Q&A: List 3 common usage of market indexes.

  • As benchmarks for portfolio performance (on a risk-adjusted basis )
  • To create index funds (i.e to track the performance of the specific market series over time.)
  • To help "technicians" predict future market movement. ie. as inputs for technical analysis.
  • To examine factors that affect aggregate market movements.
  • As a proxy for the market portfolio to calculate the systematic risk of an asset.

Bonus Points

  • Key factors to keep in mind when computing an index
    • the size of the sample: the larger, the better - but eventually the costs of taking a larger sample will outweigh the benefits.
    • the breadth: must represent the total population.
    • the source: must be taken from each different segment of the population
    • the weight given to each member in the sample: Price-Weighted, Value-Weighted, or others.
    • the computational procedure

Category: C++ Quant > Financial Markets

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