10. Index Construction
Introduction
How do we construct an index? An index is a portfolio of securities selected from the market by criteria that are designed to measure particular attributes, or risk drivers. The securities can be selected from all of the securities in the market, or from a subset that reflects a set of investment preferences. Some examples are liquid securities, securities with a particular credit quality, or securities with parameters like a minimum dollar price or a maximum yield or spread.
The first step is to determine the objective of the index. Is the index intended to be used by market participants who want to understand and measure the market overall? Or, is the intent to have narrower criteria to measure only a subset ...
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