Features of an Index
1. Objective Evaluation: Indies act as a benchmark to measure different market segments, an industry, or the entire market by tracking its performance. They are serving as a benchmark, and as a result, investors have to compare their performance against it.
2. Diversification: An important feature of the index is its ability to image a wide range of assets. Therefore, it is a way to manage diversification risk and avoid the consequences of the failure of any one stock or sector on index performance.
3. Transparent Methodology: Indices develop a tradable market that attracts the attention of investors and has a specific composition based on the factors included. This increases the clarity investors have when constructing the index, allowing them to make sound decisions regarding the underlying parameters.
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