NISM Certifications · NISM-Series-VIII: Equity Derivatives · Understanding Index

Which of the following is a reason that an index with fewer constituents, such as a sectoral index, is generally considered to carry higher risk than a broad-based index?

A sectoral or narrow index is riskier because it is concentrated in few stocks or one sector, which leaves much of the unsystematic risk undiversified. A broad-based index spreads exposure across many sectors and companies, so company-specific shocks have a smaller impact on it.

1. AIts constituents are always illiquid
2. BIt has higher concentration and so less diversification of unsystematic riskCorrect
3. CIt cannot be used for futures trading
4. DIt is computed only once a day