LM2: Security market indexes

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Last updated 3:42 AM on 4/8/26
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11 Terms

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An Index

 is a single measure of market performance

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Price return indexes 

measure price change only

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total return indexes

also reflect reinvested income 

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Index construction requires

  • target market

  • security selection

  • weighting method

  • rebalancing

  • reconstitution decisions

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The main weighting methods 

  • price-weighted

  • equal weighted

  • market capitalization weighted

  • fundamental weighted

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Fundamental weighting

uses measures such as book value, cash flow, revenue, earnings, and dividends rather than price 

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A tested variation of market-cap weighting 

is float-adjusted market-cap weighting, which adjusts market capitalization for market float 

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Rebalancing

reset weights

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reconstitution

changes the constituent securities

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Indexes

are used as market-sentiment gauges, benchmarks, risk and return proxies, asset-allocation proxies, and passive portfolio templates 

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Equity indexes

are commonly broad market, multi-market, sector, or style indexes