Unit study guide · NISM Series XXI-B
Introduction to Indices
6 questions in this unit
What this unit covers
- What does an equity total-return index include that its corresponding price-only index excludes?
- At a scheduled reset, how does an equal-weight index allocate weight across its constituents?
- Two companies have market values of ₹1,000 crore and ₹500 crore, with free floats of 25% and 80%. What is the first company’s free-float weight?
- A price-weighted index has prices ₹100 and ₹200 and divisor 2. After the first share splits two-for-one, what divisor preserves continuity?
- A two-stock index starts with 30% and 70% weights. Their price returns are 10% and −5%. What is the unrebalanced index return?
- A mandate maintains a long-term 60% equity and 40% bond mix. Which benchmark structure best reflects that investment opportunity set?
Key ideas
From the practice bank · 1
What does an equity total-return index include that its corresponding price-only index excludes?
A total-return index includes the effect of reinvesting constituent dividends in addition to price movements. A price-only index does not include that dividend-return component. Remember: Dividend treatment matters when comparing equity performance with an index.
Hint Consider the income received while a share is held. Common mistake: Comparing a dividend-inclusive portfolio return with a price-only benchmark.
XXI-B-071From the practice bank · 2
At a scheduled reset, how does an equal-weight index allocate weight across its constituents?
An equal-weight index gives each constituent the same weight at the scheduled reset. The weights can subsequently drift as constituent returns differ. Remember: Equal weights are restored by the methodology rather than remaining automatically equal.
Hint Focus on the rule at the reset date rather than later price drift. Common mistake: Assuming equal-weight indices need no rebalancing after prices change.
XXI-B-072From the practice bank · 3
Two companies have market values of ₹1,000 crore and ₹500 crore, with free floats of 25% and 80%. What is the first company’s free-float weight?
The first company’s weight is 38.46% because its free-float value is ₹250 crore out of ₹650 crore. First value = ₹1,000 crore × 25% = ₹250 crore. Second value = ₹500 crore × 80% = ₹400 crore. Weight = ₹250 ÷ ₹650 × 100 = 38.46%. Remember: Free-float weighting uses adjusted market values, not raw share prices.
Hint Adjust both company values for free float before comparing them. Common mistake: Mistaking a company’s free-float percentage for its final index weight.
XXI-B-073From the practice bank · 4
A price-weighted index has prices ₹100 and ₹200 and divisor 2. After the first share splits two-for-one, what divisor preserves continuity?
The new divisor is approximately 1.6667 because the split should not change the index’s economic level. Old index = (₹100 + ₹200) ÷ 2 = 150. New prices are ₹50 and ₹200. New divisor = 250 ÷ 150 = 1.6667. Remember: Divisor adjustments prevent corporate actions from creating artificial index returns.
Hint Keep the index level unchanged when only the share denomination changes. Common mistake: Treating a stock split as a loss of economic value for index holders.
XXI-B-074From the practice bank · 5
A two-stock index starts with 30% and 70% weights. Their price returns are 10% and −5%. What is the unrebalanced index return?
The index return is −0.50% because the larger holding’s loss outweighs the smaller holding’s gain. Working: 0.30 × 10% + 0.70 × (−5%) = 3.00% − 3.50% = −0.50%. Remember: Constituent weights determine their contribution to an index return.
Hint Measure each stock’s contribution using its starting weight. Common mistake: Averaging stock returns without considering their index weights.
XXI-B-075From the practice bank · 6
A mandate maintains a long-term 60% equity and 40% bond mix. Which benchmark structure best reflects that investment opportunity set?
A composite of suitable equity and bond indices can represent the mandate’s policy mix. Its weights and rebalancing convention should be clearly specified. Remember: A mixed-asset mandate often needs a mixed-asset benchmark.
Hint Match the benchmark’s underlying exposures to the portfolio’s policy. Common mistake: Choosing a familiar index even when it does not match the mandate.
XXI-B-076