NISM VIII Understanding the Index — Practice Questions
Questions on market indices and why they matter to a derivatives trader: how an index is constructed and weighted, free-float market capitalisation, index maintenance, and the difference between price and total return indices.
34 questions on Understanding the Index in the ScoreSetu bank — each with a detailed explanation and, where useful, a memory hook.
What this topic covers
- Index construction and weighting
- Free-float market capitalisation
- Index maintenance and rebalancing
- Price vs total return index
Free sample questions
1. All the 50 stocks of NSE Nifty index are equally weighed while calculating the index - State True or False ?
- A. True
- B. False ✅
Answer: B — False
Why: The NIFTY 50 index is a well-diversified 50 companies index reflecting overall market conditions. NIFTY 50 Index is computed using free float market capitalization method. As per this method, the 50 stocks of Nifty are weighed as per their free float market capitalisation. For eg - Reliance Industry has a weightage of appx 7% where as Wipro has a weightage of appx 2% in Nifty.
💡 Nifty 50 uses FREE-FLOAT market-cap weights, NOT equal weights. FALSE.
2. In case there is a Stock Split of a company which is a part of an Index, than what will its impact on the index value?
- A. The index value can increase or decrease but this cannot be forecasted with accuracy
- B. The index value will remain unchanged ✅
- C. The index value will decrease
- D. The index value will increase
Answer: B — The index value will remain unchanged
Why: A stock split lowers its stock price but doesn't weaken its value to current shareholders as the number of shares increase proportionally. Stock Split has an effect on Options, Strike Price etc. but has no impact on the index as such. Therefore, w hen a stock which is part of the index has a stock split, it does not have an impact on the index.
💡 Stock split -> index UNCHANGED (price down, shares up proportionally).
3. Identify which of these is not an application of indices?
- A. Exchange traded funds
- B. Index funds
- C. Index derivatives
- D. Private equity funds ✅
Answer: D — Private equity funds
Why: Private Equity Funds are not connected to any index nor are they listed on a stock exchange. Traditionally, indices were used as a measure to understand the overall direction of stock market. However, few applications on index have emerged in the investment field such as Index Funds, Index Derivatives, Exchange Traded Funds etc.
💡 Index apps = ETFs, index funds, index derivatives; NOT private equity funds.
Practise all 34 Understanding the Index questions
Plus the full 697-question NISM VIII bank and real-feel mock exams.