Page 27 - FINAL CFA SLIDES DECEMBER 2018 DAY 13
P. 27
Session Unit 13:
LOS 45.f: Describe rebalancing and
reconstitution of an index., p.225 45. Security Market Indexes
Rebalancing:
• For a portfolio –this is adjusting the weights of securities to their target weights after
price changes have affected the weights.
• For index calculations –this is periodic (usually quarterly) adjustment to target weights on
the index securities. Because the weights in price- and value-weighted indexes (portfolios)
are adjusted to their correct values by changes in prices, rebalancing is an issue primarily
for equal-weighted indexes.
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Reconstitution -periodically adding and deleting securities that make up an
index. Indexes are reconstituted to reflect corporate events such as bankruptcy or
delisting of index firms and are at the subjective judgment of a committee.
• Add new security – price rises! Delete securities –its price falls!
• Note that additions and deletions also require that the weights on the returns
of other index stocks be adjusted to conform to the desired weighting scheme.
