16

Question 1

What must an equity indexed use as a benchmark be?

Answer 1

rules based– must be consistent, objective and predictable, so investors can replicate the investment performance of the index
Transparent – the rules underline the index are public, clearly stated and understandable to investors
Investable – investors can replicate the return and risk performance of the index

Question 2

What are the considerations in choosing a benchmark?

Answer 2

Determining the desired market and risk exposures
Identifying the methods used in constructing and maintaining the index

Question 3

Risk factor exposure

Answer 3

Refers to the expected, sensitivity of portfolio returns to various risk factors
Examples of risk factors used in portfolio construction include market risk, firm size, style for example, growth versus value and prior returns. Other factors considered include the liquidity, volatility, and firm quality.

Question 4

Methods of index waiting

Answer 4

Market cap
Price waiting
Equal waiting
Fundamental waiting

Question 5

Price waiting

Answer 5

Waiting each portfolio stock by its price. This can be achieved with a portfolio that hold an equal number of shares of each index stock, which gives stocks with higher share prices, larger index weights.

Question 6

Fundamental waiting

Answer 6

Refers to waiting the index, Stocks, by their proportion of the total index value of a fundamental factor, such a sales income or dividends

Question 7

Effective number of stocks

Answer 7

1/HHI

Question 8

Herfindahl hirschman index

Answer 8

Concentration can be captured, using the concept of effective number of stocks, which can be measured using this index. Ranges from 1/n for an equally waited portfolio to 1 for a single stock portfolio. As HHI increases concentration risk increases

Question 9

Reconstitution

Answer 9

Is the process of removing, and replacing stock that no longer fit the desired market exposure of an index

Question 10

Buffering

Answer 10

Refers to the practice of establishing a threshold level for the change in a firms capitalisation rank that must be met before moving it from one index to another on a reconstituted date

Question 11

Method For reducing trading costs associated with migration of a stock between indexes on reconstitution dates

Answer 11

Buffering
Packeting

Question 12

Packeting

Answer 12

When a MidCap companies capitalisation increases so that it qualifies as large Stock, half of the portfolio position is moved to the large Index on the reconstitution date. If the stock still meet the criteria for inclusion in the large Index at the next reconstitution date, the remainder of the position is move for the MidCap to large Index