Question

i. State and describe an index on the local bourse

ii. Assess the use of market indices in portfolio management.

Answer 1

An Index is the group/list of selected stocks/other securities classes which are presented in a combined way in 'points' which is derived as the weighted average of the spot/closing market prices of all the stocks/other securities which are part of that Index. Some of the example of the global Indices are S&P Global 100 Index, Dow Jones Global Titans 50 etc.

Market Indices are very useful in portfolio Management because of the following reasons:

1) Indices are treated as Benchmarks to evaluate the performance of the portfolio.

2) Indices are used as risk benchmarks as they represent market risk.

3) Indices are used as passive portfolio management strategy.

4) Indices provide Beta Co-efficient.

5) Indices are helpful in calculating risk premium.