(i) What is a stock exchange index?
(ii) Outline four drawbacks of the Nairobi Stock Exchange index
ANSWER
(i) An index in general terms is a measure of relative change from one point in price to another. Stock indices measure changes in price or value.
(ii) Drawbacks of NSE:
– 20 companies not true representatives
– Thinness of the market – small changes in the active stocks tend to be considerably magnified in the index.
– 1966 base year too far in the past
– Relatively small price changes – some stock prices do not change for weeks on end.
– Lack of clear portfolio selection criteria
– Use of arithmetic instead of preferred geometric mean in computing index.
– New companies have been quoted and others deregistered.
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