Unit study guide · NISM Series VIII
Understanding the Index
6 questions in this unit
What this unit covers
- Under the methodology currently used for the Nifty 50, constituent weights are based primarily on:
- An index has a base value of 1,000 and a base free-float market capitalisation of ₹600 crore. If the comparable current free-float market capitalisation is ₹750 crore and no divisor adjustment is required, what is the index level?
- For a required trade size, the ideal market price of a share is ₹100, but the order is actually executed at an average price of ₹101. Ignoring other charges, the market impact cost for the buy order is:
- A mutual fund wants to compare its diversified large-cap portfolio return with a broad market reference. Which is the most direct use of an equity index in this situation?
- Why may an index provider adjust the index divisor when a corporate action changes constituent market capitalisation mechanically but should not represent an economic market move?
- Why is low impact cost desirable when selecting securities for a tradable market index?
Key ideas
From the practice bank · 1
Under the methodology currently used for the Nifty 50, constituent weights are based primarily on:
Nifty 50 is calculated using the free-float market-capitalisation weighted method. Free float focuses on shares considered available for trading rather than giving full weight to strategic or promoter holdings. Remember: Nifty 50 weights constituents by free-float market capitalisation, not full market capitalisation or equal weights.
Hint Common mistake: Assuming every share a company has issued counts towards its index weight.
VIII-009From the practice bank · 2
An index has a base value of 1,000 and a base free-float market capitalisation of ₹600 crore. If the comparable current free-float market capitalisation is ₹750 crore and no divisor adjustment is required, what is the index level?
Index level = Base index value × (Current free-float market capitalisation ÷ Base free-float market capitalisation). Therefore, 1,000 × (750 ÷ 600) = 1,250. Remember: For a simple market-cap-weighted index example, scale the base index value by the ratio of current to base market capitalisation, subject to divisor adjustments in real index maintenance.
Hint Common mistake: Adding the rupee increase directly to the index level instead of using a ratio.
VIII-010From the practice bank · 3
For a required trade size, the ideal market price of a share is ₹100, but the order is actually executed at an average price of ₹101. Ignoring other charges, the market impact cost for the buy order is:
measures the price deterioration caused by executing a given trade size relative to an ideal price. Here, the execution is ₹1 above an ideal price of ₹100, so impact cost = (101 − 100) ÷ 100 × 100 = 1%. Remember: Impact cost is a practical measure: larger execution slippage from the ideal price means higher impact cost.
Hint Common mistake: Confusing impact cost with brokerage, or bid-ask spread alone.
VIII-011From the practice bank · 4
A mutual fund wants to compare its diversified large-cap portfolio return with a broad market reference. Which is the most direct use of an equity index in this situation?
An equity index provides a transparent reference against which portfolio performance can be compared. Indices are widely used as benchmarks, as underlyings for products and as indicators of market segments. Remember: An index is a measurement and benchmarking tool. It is not a return guarantee.
Hint Common mistake: Treating a benchmark as a promised target return.
VIII-105From the practice bank · 5
Why may an index provider adjust the index divisor when a corporate action changes constituent market capitalisation mechanically but should not represent an economic market move?
A divisor adjustment is used to preserve index continuity when events such as certain corporate actions alter the mathematical market-capitalisation base without representing an equivalent market return. The aim is to prevent an artificial jump or drop caused purely by the event mechanics. Remember: Index maintenance separates genuine price movement from mechanical changes caused by constituent events.
Hint Common mistake: Believing the index divisor is permanently fixed.
VIII-106From the practice bank · 6
Why is low impact cost desirable when selecting securities for a tradable market index?
Impact cost measures the price effect of executing a specified trade size relative to an ideal price. Lower impact cost generally indicates better liquidity and makes the index easier for market participants and products to track or replicate. Remember: A good tradable index must be representative and practically replicable. Liquidity matters.
Hint Common mistake: Confusing liquidity quality with expected price performance.
VIII-107Impact cost is the difference between the price shown on screen and the price a trade is actually filled at.
Read moreLiquidity describes how easily a given quantity can be traded.
Read moreSecurities Transaction Tax (STT) is a statutory tax the Government of India levies on purchases and sales of securities.
Read more