Question

You are asked to do the work of an index provider for a client. Which of the following should you determine first in constructing a portfolio of securities?

Group of answer choices

Target market of the securities in the index

Allocation or weights of securities in the index

List of securities passing a specific performance parameter

Answer 1

The construction of an Index is basically to act as a barometer for the movement of either an economy or large cap companies or small cap companies or some other criteria. The first step that you should determine is the list of securities which matches with the desired output performance, the weight or target market is normally decided at later stage to match whether the risk is also similar or not. So, the correct answer is

List of securities passing a specific performance criterion.

The performance criteria can be based on anything like large market capitalization or tech companies or financial companies.