Question

Explain how by using the S&P 500 index you may try to build a portfolio that may beat (outperform) the S&P 500 index results in both return and risk?

Answer 1

S&P 500 Index- It is a weighted index of 500 largest US public companies. It is a benchmark for retail and institutional investors and it is also a barometer of US stock market.

If you use S&P 500 as a benchmark to build your portfolio, it will give you following advantages:

1. Its depth and breadth are more than any other index in USA.
2. It represents different companies of different sectors.
3. It is mostly used to represent the state of economy of USA. It can provide the broad view of economy and stock market.
4. Components of S&P 500 index keep on updating every quarter so the companies that are not performing well from past few months, are not included in the index.
5. This index uses market capitalization weighting method that gives higher percentage to the companies that have larger market capitalization.