## Standard & Poor's 500 Index Calculation

Index Calculation | Total Return Calculation | Index Maintenance | Divisor Analysis | Share Changes | Criteria For Changes | Guidelines For Adding Stocks | Guidelines For Removing Stocks | S&P/BARRA | Comparative Analysis |

The Standard & Poor's 500 Index is calculated using a base-weighted aggregate methodology; that means the level of the Index reflects the total market value of all 500 component stocks relative to a particular base period. Statisticians refer to this type of index, one with a set of combined variables (such as price and number of shares), as a composite index.

Total market value of a company is determined by multiplying the price of the stock by the number of common shares outstanding. An indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time. It is much easier to graph a chart based on indexed values than one based on actual values.

The S&P 500's base period is 1941-43. The actual total market value of the stocks in the Index during the base period has been set equal to an indexed value of 10. This is often indicated by the notation 1941-43=10. The formula used to calculate the Index is fairly straightforward. However, the calculation of the adjustments to the Index (commonly called Index Maintenance) is more complex.

In practice, the daily calculation of the Standard & Poor's 500 Index is computed by dividing the total market value of the 500 companies in the Index by a number called the Index Divisor. By itself, the Divisor is an arbitrary number. However, in the context of the calculation of the S&P 500 Index, it is the only link to the original base period value of the Index. The Divisor keeps the Index comparable over time and is the manipulation point for all Index Maintenance adjustments.

An example of how an index is calculated, using three stocks for illustrative purposes, follows. First, a starting point-or base period-is selected. Next, the initial total market value of the three-stock index at the base period is calculated by first taking each company's number of outstanding common shares and multiplying it by its price per share to determine the market value of each stock. Then, the three market values are added together. The total is the base period market value for the index. That total then is indexed (set equal to 10 ) and used to calculate the base period divisor. The base period divisor in this example (base period market value divided by base period index value) is 1,000,000.

Suppose that the next day the per-share price of each of the three stocks in our index goes up exactly 10%. Since there have been no changes in the number of common shares outstanding, the market value of each company in the index also will go up 10%. That new market value is divided by the index divisor, which remained unchanged at 1,000,000. The new closing value of the index is 110, also exactly 10% higher than the previous day's closing value.

This three-stock example illustrates the exact steps used every day to calculate the Standard & Poor's 500. The Index always is calculated by adding the market values of its 500 components and dividing that sum by the latest Index Divisor. The same procedure is used to calculate the four S&P 500 major industry sector indices (Industrials, Financials, Transportation, and Utilities) and the individual industry group indices.

The closing S&P 500 Index value for 1993 was 466.45. This indicates that the 1993 closing market value for the Index was 46.6 times the average market value of the Index during the base period 1941-43. Therefore, a portfolio of stocks that exactly replicated the S&P 500 stock portfolio over the past 52 years would have increased in value by almost 4,565% not counting any dividends.

### Total Return Calculation [Return to Top]

The total-return calculation of the Standard & Poor's 500 Index has become increasingly important. Both the Association for Investment Management and Research's (AIMR) performance measurement standards and the SEC's executive compensation ruling require total return performance calculations and comparison to appropriate market benchmarks. Calculating the total return for any equity security is relatively straightforward: simply add dividend income and price appreciation for a given time period. The total return for the S&P 500 Index is calculated similarly; an indexed dividend return is added to the Index price change for a given time period.

To actually calculate the total return for the Standard & Poor's 500 Index for a given time period, an indexed dividend for that time period is added to the closing S&P 500 Index value for that period. Then, this number is divided by the closing S&P 500 Index value at the beginning of the time period. The indexed dividend is an index number that represents the dividend distribution of the companies in the S&P 500 Index. It is calculated by adding the total daily dividends (based on the ex-dividend date) for all of the stocks in the Index for a given time period, converting it to an indexed number by dividing it by the same Index Divisor that is used to calculate the actual S&P 500 Index.

The general formula to calculate the indexed dividend is:

`Total Daily Dividends______________________  = Indexed DividendLatest Index Divisor`

The Daily Indexed Dividend for the Standard & Poor's 500 Index on December 1, 1993, can be calculated using the above formula and the appropriate index divisor of 7066.2805.

`276 6941_________  = Indexed Dividend7066.2805Indexed Dividend = 0.03916`

Standard & Poor's uses the ex-dividend date rather than the payment date to determine the total daily dividends for each day because the marketplace price adjustment for the dividend occurs on the ex-date. Treatment of special dividends, such as stock dividends and extraordinary dividends, within the S&P 500 Index calculation is decided upon on a case by-case basis.

The Standard & Poor's 500 Index total-return calculation assumes the reinvestment of dividends on a daily basis. Monthly, quarterly, and annual total-return numbers for the S&P 500 Index are calculated by daily compounding of the reinvested dividends.

The total-return calculations for the S&P 500 Index industry groups are calculated with dividends reinvested on a monthly, not a daily basis. The quarterly and annual industry total return numbers are calculated by compounding the monthly total returns.

There are four different total-return indices for the Standard & Poor's 500 Index: 1936, 1970, 1988, and year-to-date. Each one uses a different base period. The 1936 and 1970 total return indices were developed for historical use. Dividends are reinvested quarterly from 1936 through 1988 in the 1936 total-return index, and dividends are reinvested monthly from 1970 through 1988 in the 1970 total-return index. The 1988 total-return index is calculated based on daily reinvestment of dividends and uses January 1, 1988, as the base period. The year-to-date total-return index is also calculated assuming daily reinvestment of dividends; however, the base period is the last day of the prior year.

Maintenance of the Standard & Poor's 500 Index is detail oriented and time consuming. Index maintenance includes monitoring and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends, and stock price adjustments due to company restructurings or spinoffs. Some corporate actions, such as stock splits and stock dividends, require simple changes in the common shares outstanding and the stock prices of the companies in the Index. Other corporate actions, such as share issuances, change the market value of the Index and require an Index Divisor adjustment as well.

To prevent the value of the Index from changing due to corporate actions, all corporate actions which affect the market value of the Index require a Divisor adjustment. By adjusting the Index Divisor for the change in market value, the value of the Standard & Poor's 500 Index remains constant. This helps keep the value of the Index accurate as a barometer of stock market performance and ensures that the movement of the Index does not reflect the corporate actions of the companies in the Index. All Divisor adjustments are made after the close of trading and after the calculation of the closing value of the S&P 500 Index. Any change in the S&P 500 Index Divisor also affects the corresponding S&P major industry sector and individual industry group divisors.

The table below summarizes the types of S&P 500 Index maintenance adjustments and indicates whether or not a divisor adjustment is required.

 S&P 500 -- Types of Maintenance Adjustments Type of Corporate Action Adjustment Factor Divisor Adjustment Required Stock split (i.e. 2x1) Shares Outstanding multiplied by 2 Stock Price divided by 2 No Share issuance (i.e. Change greater or equal to 5%) Shares Outstanding plus Newly issued Shares Yes Share repurchase (i.e. Change greater or equal to 5%) Shares Outstanding minus Repurchased Shares Yes Special cash dividends Share Price minus Special Dividend Yes Company change Add new company market value minus old company market value Yes Rights offering (Price of parent company minus Price of Rights/Right Ratio) Yes Spinoffs Price of Parent company minus (Price of Spinoff Co./Share Exchange Ratio) Yes

The Standard & Poor's 500 Index Divisor can be used quickly to analyze the impact of an event, such as a stock's price response to an earnings surprise, on the value of the S&P 500 Index. The effect of the event on the S&P 500 can be accurately estimated by determining the market value impact of an event and dividing by the Index Divisor. Likewise, an impact on the Index can be viewed in reverse. The required change in market value to move the S&P 500 Index one basis point, or 0.01, can be estimated by multiplying the Index Divisor by one basis point. The most frequent use of divisor analysis is to determine which stock or stocks moved the S&P 500 Index on a particular day. (Note: divisor analysis should only be used to analyze the affect of corporate actions which do not require a divisor adjustment. Corporate actions which require a divisor adjustment do not change the Index value.)

The general formula for divisor analysis is:

`Market Value Impact_________________     = Impact on Index (Basis points)Index Divisor`

A large part of the Standard & Poor's 500 Index maintenance process involves tracking the changes in the number of shares outstanding of each of the S&P 500 Index companies. One of the largest changes made to the Index Divisor is the divisor adjustment for the quarterly update of common shares outstanding for all S&P 500 Index companies. Four times a year, on a Friday close to the end of each calendar quarter, the share totals of as many as 450 of the companies in the Index have been updated. After the totals are updated, the Index Divisor is adjusted to compensate for the net change in the market value of the Index.

Determining the exact number of common shares outstanding for the companies in the Index is a tremendous task. Shares outstanding are constantly changing. After much testing, Standard & Poor's has adopted a policy that share changes of less than 5% are only updated on a quarterly basis. Updating share changes of less than 5% on a quarterly basis still maintains the statistical accuracy of the S&P 500 Index. In addition, it preserves the mathematical properties of the Index Divisor. If S&P changed the number of shares outstanding in the S&P 500 Index daily, adjustments would also need to be made to the divisor every day. Those changes would slowly erode its validity, and rounding errors would accumulate until they became statistically significant. As a result of this policy, the shares outstanding used in the calculation of the S&P 500 Index are close to the number reported by constituent companies, but the two totals are rarely exactly the same.

Once a week the database containing the current common shares outstanding for the Standard & Poor's 500 Index companies, which is updated daily, is compared against the shares outstanding used to actually calculate the Index. Any difference of 5% or more is screened for review. If appropriate, a share change will be implemented after the close of trading on the following Wednesday. Preannounced corporate actions such as restructurings or recapitalizations can significantly change a company's shares outstanding. Any changes over 5% are carefully reviewed, and when appropriate, an immediate adjustment is made to the number of shares outstanding used to calculate the Index.

### Criteria For Index Company Changes [Return to Top]

The stocks in the S&P 500 Index are selected primarily to be representative of the U.S. economy, as reflected by the U.S. stock market. The objective is to ensure that companies in the Index are the leading companies in the leading industries, allowing the 500 to serve as a benchmark not only for the U.S. equity market as a whole but also for individual industry groups and corporations.

The Standard & Poor's 500 Index always contains 500 different common stocks. New companies can only enter the Index when there is a vacancy. Companies may not apply for inclusion in the Index, and their agents (including investment bankers and investor relations and public relations firms) may not nominate them. The selections are made autonomously (only using public information) on an as-needed basis by the S&P Index Committee. So, as they say in Hollywood: "Don't call us; we'll call you." That call, accompanied by a faxed copy of the press release announcing the selection, is made at the same time that the rest of the world is informed of the decision through its release to the financial news media.

The Index Committee does not mechanically choose potential replacements for companies in the Index through a quantitative ranking system. The selection process follows the quantitative screening with detailed fundamental analysis. The general criteria used for both the S&P 500 and the S&P MidCap 400 Indices are the same. However, the acceptable levels of closely held ownership and liquidity are more stringently applied to candidates for the S&P 500 Index.

Meeting the general selection criteria is the first step to Index candidacy. Using S&P's Stock Guide database, all U.S. publicly traded companies are screened for candidacy in the S&P 500 Index. The objective screens begin with the elimination of foreign companies whose stocks trade as American Depositary Receipts (ADRs) or as American Depositary Shares (ADSs). Mutual funds, limited partnerships, royalty trusts and real estate investment trusts (REITS) also are eliminated. Index candidates also must be traded either on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ National Market System. The remaining companies then are ranked by their market value, from highest to lowest, within their industry sectors.

Next, the companies are checked for their trading liquidity. Besides their public floats, their liquidity / turnover ratios are examined. For example, a liquidity / turnover ratio of 1:1 means that the year's trading volume in the stock equals the number of shares outstanding. At the end of 1993, the minimum liquidity / turnover ratio used in screening for the Standard & Poor's 500 was 0.2, meaning that a stock's annual trading volume had to equal at least 20% of its shares outstanding. However, this criterion is not carved in stone. There are several major companies in the Index, including AT&T and Exxon, that have liquidity / turnover ratios of less than 0.2 because of large institutional holdings (many of them indexed) and because of thousands of long-term holdings by individual investors. These stocks also have large floats and huge trading volume that make them among the most liquid of all common shares.

Companies that meet these criteria are then reviewed through an in-depth analysis of public information. Their market statistics, financial statements, and operations are examined, although the expected stock price performance of the company is not considered. The Committee also looks at a candidate's effect on its appropriate Index industry group. All companies added to the S&P 500 Index should "add value" to both the overall Index and the industry group to which they would be assigned.

Companies that meet the general selection criteria and pass the in-depth review are voted upon by the Index Committee. Companies receiving unanimous approval for inclusion into the Index are added to the Standard & Poor's 500 Index Replacement Pool. It is from the Replacement Pool that companies are chosen for the S&P 500 Index. On average, the S&P 500 Index Replacement Pool contains at least 10 companies. Whenever there is an Index vacancy, the most appropriate company in the Replacement Pool is chosen for inclusion in the Index. Not all companies in the Replacement Pool are added to the Index. Their qualifications for membership in the Index are monitored on an ongoing basis. If a company no longer meets the selection criteria, it is dropped from the Replacement Pool.

While foreign companies whose shares trade as ADRs or ADSs are not eligible for the Standard & Poor's 500 Index, as of December 31, 1993, there were 13 foreign-based companies in the S&P 500 Index. For all 13, only their regular shares that trade on U.S. exchanges are used in calculating the Index. Three of the companies -- Schlumberger Ltd., Syntex Corp. (which was removed from the S&P Index in June 1994, after it agreed to be taken over by Swiss-based Roche Holding AG) and McDermott International, Inc. -- were registered in Caribbean nations but actually headquartered in the United States. This is a situahon similar to more than 240 companies in the S&P 500 Index that are incorporated in Delaware but headquartered elsewhere.

Almost two-thirds of the foreign-based companies were headquartered in Canada. One of them, Alcan Aluminium Ltd., has been in the 500, or its precursors, since 1935. Inco, Ltd., the largest nickel producer outside of the former Soviet Union, has been in the Index since 1940. Three other companies, American Barrick Resources Corp., Placer Dome, Inc., and Echo Bay Mines Ltd., have major precious metals mines in the United States. The remaining three, Moore Corp. Ltd., Northern Telecom Ltd., and Seagram Co. Ltd., like the other Canadian companies, have significant operations and industry market shares in the United States. The two companies headquartered in the Netherlands-Royal Dutch Petroleum Co. and Unilever N.V.-are major multinationals that have been in the S&P 500 since 1957 and 1961, respectively, and can be considered "grandfathered."

All of these foreign-domiciled companies, which had significant U.S. institutional ownership and were actively traded in the United States when they were first included in the Index, have to meet the same SEC disclosure requirements as U.S.-based companies. They must provide their investors with English-language financial reports and financial statements either prepared in direct accordance with U.S. generally accepted accounting principles (GAAP) or reconciled with U.S. GAAP.

The U.S.- traded shares of the Canadian and Dutch companies are regular common shares. They represent the same ownership stake, have the same voting rights, and are entitled to the same dividends as the shares of those companies traded on Canadian or European stock exchanges. Those dividends are paid net of a 15% withholding tax levied by their countries of incorporation, but are sent to U.S. shareholders in U.S. dollars.

## General Guidelines For Adding Stocks To The S&P Index

1. Market Value -- The S&P 500 is a market-value weighted Index. The Companies chosen for the S&P 500 generally have the largest market value within their industry.
2. Industry Group Classification -- Companies selected for the S&P 500 represent important industry segments within the U.S. economy.
3. Capitalization -- Ownership of a Company's common shares outstanding is carefully analyzed in order to screen-out closely-held companies.
4. Trading Activity -- The trading activity (volume) of a company's stock is analyzed on a daily, monthly, and annual basis to ensure ample liquidity and efficient share pricing.
5. Fundamental Analysis -- Both the financial and operating condition of a company are rigorously analyzed. The goal is to add companies to the Index which are relatively stable and will keep turnover in the Index low.
6. Emerging Industries -- Companies in emerging industries and/or new industry groups (industry groups currently not represented in the index) are candidates for the Index as long as they meet the guidelines listed above. [Return to Top]

#### Removals

Companies are removed from the S&P 500 Index for four main reasons: merger with or acquisition by another company, restructuring, financial operating failure, or lack of representation. Historically, the most common reason for removal has been merger or acquisition, and the least common reason has been lack of representation.

The Standard & Poor's Index Products / Services Group constantly monitors the capitalization activities of the companies in the 500. Upcoming mergers, acquisitions, and restructurings are analyzed and brought before the S&P Index Committee. The Committee determines the most appropriate action to take for each event. Sometimes it is blatantly obvious that a company must be removed from the Index. In other cases, the effect of a capitalization change is less clear. The continued inclusion in the Index of a post-merger or post-spinoff original company and the possible inclusion in the Index of a spinoff company must be evaluated. As the table below indicates, each situation is unique.

A corporation's inclusion in the Index is not an opinion on its investment merits, but it does include the assumption that it will remain in business. Thus, in cases of bankruptcy, the filing company is removed from the Index and a company in the S&P 500 Index Replacement Pool is added. A candidate in the Replacement Pool is on standby at all times just for such contingencies. In some rare cases, it is not possible to make a preannouncement five days in advance of the change. This situation occurred when JWP, Inc. and Wang Labs, Inc. filed for Chapter 11 and were removed from the 500 with a preannouncement only one day in advance of the change.

The removal of a company from the Index due to lack of representation is less clear-cut. Lack of representation most often involves those cases in which a corporation has declined in size (usually, though not exclusively, because of financial problems) to the point where it no longer contributes much to the price performance of its industry group, let alone the overall Index. It also can include situations where a company no longer meets other criteria for inclusion. For example, the company could be in an industry that has declined in economic importance because of technological obsolescence. It may still be a leading company, but it is no longer in a leading industry. In some cases, restructurings may leave the stock so closely held that the security becomes illiquid. Although companies that have been removed from the Index for lack of representation typically have extremely low market values for extended periods, they are not removed just because of their low market values.

Maintaining the stability of the company population in the S&P 500 Index and keeping an accurate representation of U.S. publicly traded companies in the Index are the primary considerations in managing the Index. Companies are not removed from the Index due to poor stock price performance. Excessive turnover of companies in the Index would affect the statistical validity of the Index as a gauge of overall U.S. stock market performance.

## General Guidelines For Removing Stocks From The S&P 500 Index

1. Merger, Acquisition, LBO -- Company is removed from the Index as close as possible to the actual transaction date.
2. Bankruptcy -- Company is removed from the Index immediately after a Chapter 11 filing or as soon as an alternative recapitalization plan (that changes the Company's debt / equity mix) is approved by shareholders.
3. Restructuring -- Each company restructuring plan is analyzed in-depth. the restructured company as well as any spun-off companies are reviewed for Index inclusion / exclusion.
4. Lack of Representation -- A Company can be removed from the Index because it no longer meets current criteria for inclusion and/or is no longer representative of its industry group. This is the least common reason for removing a company from the Index. [Return to Top]

### S&P/BARRA Growth & Value Indices [Return to Top]

The S&P/BARRA Growth Index and the S&P/BARRA Value Index, introduced in May 1992, were developed to track the two predominant investment styles in the U.S. equity market. Using an asset class factor model, a method designed by 1990 Nobel Laureate William F. Sharpe, the companies in the Standard & Poor's 500 Index are classified as either growth or value, a distinction that can account for almost 90% of the monthly variation in return of a typical style-tilted investment portfolio. Following Sharpe's methodology, the companies in the S&P 500 Index were split into two mutually exclusive groups based upon a single attribute: price-to-book ratio.

The Growth Index contains the companies with higher price-to-book ratios, while the Value Index contains those with lower price-to-book ratios. Just like the Standard & Poor's 500 Index, the S&P/BARRA Growth and Value Indices are market-value-weighted. The companies are split so that approximately half of the market value of the S&P 500 Index is in the S&P/ BARRA Growth Index and half is in the S&P/BARRA Value Index. Sharpe's research indicates that the typical growth-and-income mutual fund has "an almost perfect balance between value and growth stocks, reflecting an 'S&P 500-like' stance with respect to large capitalization stocks." More companies are classified as value than growth, because growth companies tend to have larger market values.

The composition of the S&P/BARRA Growth and Value Indices is rebalanced semiannually on January 1 and July 1, based upon price-to-book ratios and market capitalizations after the close of trading one month earlier (November 30 and May 31, respectively). The total-return value for each Index is calculated monthly. Historical data going back to 1975 also have been calculated, using the same procedures to screen the actual components of the S&P 500 Index over that period. Closing index values (excluding dividends) have been calculated daily since January 1993 for each S&P/BARRA Index.

Book value is defined as the total of a company's assets (such as plant and equipment, inventories, receivables, and intangibles like goodwill), minus all liabilities. Price-to-book ratios tend to be more stable than P/E ratios or return on equity; however, they can still be used to classify stocks, since they tend to differ for growth companies and value companies. In general, growth companies tend to have high P/E ratios, low dividend yields, and above-average earnings growth rates. Conversely, value companies tend to have low P/E ratios, high dividend yields, and below average earnings growth rates.

There is no one industry-standard definition of either growth or value. Accordingly, it is important to note that the portfolio selection process will arbitrarily (but not capriciously) define each and every stock in the Standard & Poor's 500 as either growth or value. Because the selection mechanism is strictly statistical, the companies assigned to the Growth Index may not necessarily be perceived by the investing public as growth companies. Likewise, many of the companies classified as value stocks are likely to have reputations as growth stocks. In fact, the consumer staples, perceived as defensive stocks, were heavily represented in the Growth Index at the end of 1993, while technology stocks were fairly evenly distributed between the Indices.

What matters is the fact that the stocks assigned to the Growth Index have tended to perform as if they were growth stocks, while those assigned to the Value Index have tended to perform as if they were value stocks. As theory suggests, the Betas on the stocks in the Growth Index tend to be above 1.00, while those in the Value Index tend to be below 1.00.

Many of the stocks change classification at each semi-annual rebalancing. Turnover in the Growth and Value Indices has averaged about 20% per year since 1975, reflecting both changes in the composition of the S&P 500 and changes in the relative price-to-book ratios of the companies in the 500 at the semi-annual index rebalancing dates.

Statistical data on the Standard & Poor's 500 Index are closely followed by analysts and investors. Using this data, individual company stocks can be compared against their industry peers and against the market as a whole. Three key S&P 500 data items frequently used by professionals are earnings/expected earnings, P/E ratios, and dividend yields. These three indicators provide important clues for investors trying to determine a fair price for a new stock issue. They also are used in statistical screens designed to identify overpriced or undervalued issues.

#### Earnings

Earnings are universally recognized as the single most important factor in valuing a company. A company's past earnings growth rates and their stability help to determine the future earnings power of that company. The future earnings power of a company, in turn, is the theoretical basis for a company's current stock price. Determining the future earnings for companies is an extremely important, yet highly subjective, calculation. Consequently, the earnings calculation on the S&P 500 is of great interest to investment professionals. The actual values, both current and historical, are heavily analyzed.

Standard & Poor's uses primary earnings from continuing operations, excluding the results of discontinued operations and extraordinary items, to calculate the earnings per share on the S&P 500 Index. Nonrecurring pre-tax gains and losses are included in the calculation. The earnings numbers on the S&P 500 are reported on a per share basis using indexed numbers.

Earnings data for the Standard & Poor's 500 companies are gathered by the S&P Index Products Group directly from company publications. The aggregate earnings number for the S&P 500, and for each major industry sector as well as for each individual industry group, is determined and divided by its respective Index Divisor. The result is indexed data that can be used on a comparable basis.

Standard & Poor's publishes two types of earnings data on the index. Annual data, based on the timing of each Index company's fiscal year, are published annually in the Analyst's Handbook. Quarterly data, based on quarterly earnings per share recorded during each calendar quarter, are published on a monthly basis in the Analyst's Handbook Supplements. The annual Analyst's Handbook earnings per share calculation uses May 31 as its cutoff date. For all companies with a fiscal year ending during the first five months of the year, S&P used their 1993 earnings per share in the calculation of the 1993 S&P 500 earnings-per-share index number. For companies with fiscal years ending during the last seven months of the year, S&P used their 1992 earnings per share values in the calculation of the 1993 S&P 500 earnings-per-share index number.

Earnings estimates are based on calendar-year data and are computed in three steps: (1) S&P equity analysts estimate earnings per share for all S&P 500 Index companies. (2) Earnings estimates for each company are multiplied by each company's respective shares outstanding to calculate the total earnings number for each company. (3) Total earnings are aggregated for each individual industry group, major industry sector, and the Composite, and divided by their respective end-of-period Index Divisors.

#### Dividend Yields

Dividend yields are one of the most widely monitored valuation benchmarks and provide the most tangible form of total investment return. The dividend yield for the Standard & Poor's 500 is an index figure based on the indicated annual dividend rate for each stock in the Index. Historically, since World War II, dividend yields for the S&P 500 have ranged from a low of 2.63% (set in January 1994) to a high of 8.64%. Over the past 30 years, the average has been about 4%. Typically, a yield of 5% to 6% has represented an undervalued market, while a yield of 3% or less has an indicated an overvalued market. At year-end 1993, the dividend yield for the S&P 500 was 2.70%, compared with 1992's ending rate of 2.84%. The main reason for the 4.9% decline in yields in 1993 was that dividend growth did not keep pace with the growth in stock prices during the year.

During the 1990s, dividends paid by the companies in the S&P 500 grew at an annual average rate of 7%, approximately 1 percentage point higher than their long-term trend rate of growth. However, the dividend growth rate has slowed in the 1990s. It was only 1.5% in 1992 and improved minimally to 1.6% in 1993.

#### P/E Ratio

The price-earnings ratio (P/E) is a popular indicator used to gauge the price investors are willing to pay for each dollar of a company's earnings. The ratio is generally reported two ways: on the basis of actual 12-month trailing earnings or as a multiple of analysts' projected earnings for the current year.

During the post-war era, the actual P/E ratio of the Standard & Poor's 500 Index has been as low as seven-reached in the late 1940s and again in the 1974-81 period-and has hit a peak of nearly 23-reached in 1961. Just prior to the October 1987 crash, the P/E ratio for the S&P 500 was above 20. The P/E ratio for the S&P 500 Index at year-end 1993 was 21.31 (based on actual trailing 12-month earnings), a decline of 6.62% from the 1992 actual year-end P/ E ratio of 22.82.

Historically, a S&P 500 P/E ratio of 10 or lower has indicated an attractively valued market, while a P/E of 14-15 represented a fairly valued market, and a P/E of 20 and above signaled an overvalued market.

#### Other Statistical Data

S&P also calculates and publishes additional Standard & Poor's 500 industry group statistical data, indexed on a per share basis, for use in comparative analysis. Per share indexed numbers calculated for income statement items include sales, expenses, operating income, and depreciation. Balance sheet per share numbers calculated include current assets, current liabilities, and book value. These per share numbers are calculated for the major industry sectors as well as each industry group and published in the Analyst's Handbook Annual. In addition, indexed per share cash flow, earnings, dividends, tangible book value, and equity per share data for the Composite Index are calculated and published in the Analyst's Handbook Annual.