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

Which statement about index rebalancing and reconstitution is correct?

Periodic review and reconstitution replace constituents that no longer meet eligibility criteria such as liquidity or free-float size, so the index stays representative of the market. It is not triggered by price falls and does not equalise weights.

  1. APeriodic reviews replace constituents that no longer meet eligibility criteria so that the index remains representativeCorrect
  2. BReconstitution is done only when the index falls by more than 10% in a day
  3. CConstituents once included can never be removed
  4. DReconstitution ensures that all constituents have equal weights

Explanation

Index providers review constituents periodically, usually semi-annually, and replace stocks that fail criteria such as liquidity or free-float. This keeps the index representative. It is not triggered by price falls, and weights remain market-cap based.

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