NISM Series VIII · Unit 2 of 10 · about 2% of the paper
Understanding index: NISM Series VIII notes and practice questions
Index derivatives are based on stock indices. A short unit on how an index is built.
What to know in Unit 2
- Market capitalisation weighting and free float.
- Sensex and Nifty 50.
Key terms, examples and exam traps
Stock index
A stock index is a number measuring the combined price performance of a basket of stocks, used as a market barometer and as the underlying of index derivatives.
Example. A single number tracks how 50 large companies are performing together.
Exam trap. This statement is false: An index measures the price of only one stock.
Free-float weighting
Free-float market capitalisation weighting weights each stock by the value of shares available for public trading, so promoter holdings are excluded.
Example. A company with a large promoter holding gets a smaller weight in the index.
Exam trap. This statement is false: Free-float weighting counts all issued shares.
Base value
An index starts at a base value on a base date; the Nifty 50 base is 1000 and the Sensex base is 100, and later values are relative to them.
Example. An index set at 1000 on its base date rises to 2000, doubling in value.
Exam trap. This statement is false: Every index starts at zero.
Index rebalancing
Index constituents are reviewed periodically and stocks replaced when they no longer meet criteria on market cap, liquidity and free float.
Example. An exchange replaces a stock that no longer qualifies for the index.
Exam trap. This statement is false: Index constituents never change.
Beta of a portfolio
Beta measures the sensitivity of a portfolio to market moves; a beta of 1.2 means it is expected to move 20% more than the index.
Example. A portfolio typically rises 12% when the index rises 10%.
Exam trap. This statement is false: Beta measures the dividend of a stock.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Base value”?
- An index starts at a base value on a base date; the Nifty 50 base is 1000 and the Sensex base is 100, and later values are relative to them.
- The tick size is the minimum price movement allowed for a contract, such as ₹0.05 for futures on equity.
- Theta measures the loss in option value as one day passes, other things equal. It hurts option buyers and helps sellers.
- Option premium is settled in cash on T+1; the buyer pays and the seller receives.
Q2. Which term is described here? Index constituents are reviewed periodically and stocks replaced when they no longer meet criteria on market cap, liquidity and free float.
- Index rebalancing
- Arbitrageur
- Settlement of stock options
- Price band in derivatives
Q3. Which statement about “Stock index” is correct?
- A put buyer benefits when the price rises.
- Suitability is irrelevant to broking.
- A stock index is a number measuring the combined price performance of a basket of stocks, used as a market barometer and as the underlying of index derivatives.
- An index measures the price of only one stock.
Q4. Which term is described here? Beta measures the sensitivity of a portfolio to market moves; a beta of 1.2 means it is expected to move 20% more than the index.
- Beta of a portfolio
- Speculator
- Risk disclosure document
- Market-wide position limit
Q5. Which statement about “Index rebalancing” is correct?
- Free-float weighting counts all issued shares.
- Beta measures the dividend of a stock.
- Index constituents are reviewed periodically and stocks replaced when they no longer meet criteria on market cap, liquidity and free float.
- Index constituents never change.
Q6. Which term is described here? Free-float market capitalisation weighting weights each stock by the value of shares available for public trading, so promoter holdings are excluded.
- Base value
- Stock index
- Free-float weighting
- Beta of a portfolio
Frequently asked questions
How much of NISM Series VIII comes from Unit 2?
Unit 2 (Understanding index) usually carries about 2% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series VIII Unit 2?
Market capitalisation weighting and free float. Sensex and Nifty 50.
Are these NISM Series VIII practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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