NISM Certifications · NISM-Series-VIII: Equity Derivatives · Understanding Index
Which of the following is a key reason why the NSE index is rebalanced periodically?
Indices are rebalanced periodically so they stay representative of the market. As companies' market capitalisation, liquidity and free float change, constituents that no longer qualify are replaced, keeping the index a reliable benchmark and a suitable underlying for derivatives.
- ATo keep the index representative of the market as constituents' characteristics changeCorrect
- BTo raise the index value artificially
- CTo increase trading volumes in derivatives
- DTo eliminate all price volatility
Explanation
Periodic reconstitution and rebalancing ensure the index continues to represent the segment it tracks, by replacing constituents that no longer meet eligibility criteria such as liquidity and free-float market capitalisation. It does not intend to raise the index value or remove volatility.
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