Market indices have several primary purposes: They help us gauge market sentiments. They act as proxies for measuring returns and risk. They serve as proxies for asset classes. They benchmark active managers. They model portfolios for index funds and exchange-traded…

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…

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…

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…

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. When to re-examine the portfolio construction methods. Target Market Depending…

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

A security market index serves as a representation of a specific security market, market segment, or asset class. It’s typically built using portfolios of marketable securities called constituent securities. These indexes play a significant role for investors by allowing them…

The objectives of market regulation are to control fraud, control agency problems, promote fairness, set mutually beneficial standards, prevent undercapitalized financial firms from making excessively risky investments, and ensure that long-term liabilities are funded. Control Fraud: Market regulators put systems…

A well-functioning financial system has complete markets with effective financial intermediaries and financial instruments, allowing: Investors to move money from the present to the future at a fair rate of return. Borrowers to easily obtain capital. Hedgers to offset risks….

Quote-Driven Markets/Over-the-Counter (OTC) Markets In quote-driven markets, customers trade at prices quoted by dealers who generally work for commercial banks, investment banks, broker-dealers, or trading houses. Most trades in these markets are conducted through proprietary computer communications networks or by…