The following statement appears to be not accurate in an answer key.
Turnover from an index results from reconstituion but not a rebalancing.
Isn’t this what reconstitution is? Just taking old securities out and repalacing them? Is rebalancing not just adjusting the current security weights?
Therefore is this statement not correct? Recon results in turnover and rebal does not?
Thanks
From the investopedia definitions, reconstitution refers to replacing the stocks within the index, rebalancing is more toward rebalancing their weights to give the index a more accurate measure of performance (eg: equal weighted inex would remove some of the stocks that have increased in value to re-equalize the weights of the stocks )
But then another definition I found mentioned that rebalancing and recapitalizing were one and the same: http://thismatter.com/money/stocks/indexes/security-market-indexes.htm
But regardless which definition you go by, turnover comes about from both rebalancing and reconstitution, not from reconstitution alone, hence making the statement inaccurate.
thankks