The total return of an index is the price appreciation, or change in the
value of the price return index, plus income (dividends and/or interest)
over the period, expressed as a percentage of the beginning value of the
price return index.
TRI = (V PRI1 - V PRI0 + Inc1) / V
Where TRI = the total return of the index portfolio (as a decimal number) VPRI1= the value of
the price return index at the end of the period
VPRI0 = the value of the price return index at the beginning of the period
Inc1 = the total income (dividends and/or interest) from all securities in the index held over
the period -3.5% = (1000 - VPRI0 + 45.5 12) / VPRI0;
VPRI0 = (1000 + 45.5 + 12) / (1 - 3.5%) = 1,096.
Equity Investments MCQ - Equity Investments Section 1
In the price weighting method, the divisor must be adjusted so the index
value immediately after the split is the same as the value immediately
prior to split.
Rebalancing involves adjusting securities‟ weights to maintain
consistency with the index‟s weighting method.
Reconstitution is the process of changing the constituent securities in an
index. Constituent securities that no longer meet the criteria are replaced
with securities that do meet the criteria. Thus, reconstitution reduces the
likelihood that the index includes securities that are not representative of
the target market.
Security market indices serve as model portfolios for investment
products. We cannot invest directly in an index.
