A security market index represents a given security market, market segment, or asset class, usually constructed as portfolios of marketable securities, known as constituent securities.  Indexes help investors track performance and risk, benchmark active managers, and invest in broad markets…

Index Value The formula for calculating the value of a price return index is as follow: $$ V_{PRI} = \frac{ \sum_{i=1}^{N}{n_iP_i} } { D } $$ Where: VPRI = the value of the price return index ni = the number…

Index providers generally take a top-down approach to constructing a portfolio by defining: the target market; the portfolio constituents within that market; the weights of individual securities; the rebalancing frequency; and when to re-examine the portfolio construction methods. Target Market…

There is no perfect index weighting method as each one has its own strengths and weaknesses. Price Weighting In price-weighted indices, an equal number of shares of each security is purchased, and the beginning divisor is usually set to the…

Every index weighting method has a formula that calculates the weighting of a given constituent security within an index. For the following examples, the same portfolio of three securities will be used to help illustrate the weighting methods. Note that…

Index managers must consider when the index should be rebalanced and when the security selection and weighting decisions should be re-examined. Rebalancing Rebalancing refers to adjusting the weights of the constituent securities in the index on a regularly scheduled basis…

The primary uses of market indices are to (1) gauge market sentiments, (2) serve as proxies for measuring returns and risk, (3) serve as proxies for asset classes, (4) benchmark active managers, and (5) model portfolios for index funds and…

Types of equity indices include broad market, multi-market, sector, and style indices. Broad Market Indices: typically represents more than 90% of a selected market. Common US broad market indices include the Wilshire 5000 or Russell 3000. Multi-market Indices: usually comprise indices…

Construction The number of fixed-income securities is often larger than the number of equity securities since fixed-income issuers often issue various fixed-income instruments with different characteristics. This expansive universe means that fixed-income indices may have to include thousands of different…

As alternative investments have increased in popularity, it has become necessary to create alternative investment indices. The most widely followed classes of indices include commodities, real estate, and hedge funds. Commodity Indices These indices consist of futures contracts on one…