Security Market Index Question (what do they mean by proxy?)

CFA Level I Equities
#1

CFA, Equity, Page 109, Q22

Question: Security market indices are used as:

Answer: proxies for specific asset classes in asset allocation models.

Another answer gives me “measures of investment returns”. I understand that this isn’t the answer because security market indices are “proxies” for measures of investment returns, not measures of investment returns themselves. My question is… what’s the difference between a proxy of a measure and a direct measure?

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#2

Bump… please… help… me…

#3

index is built of a bunch of securities (usually all of the same type / category etc. e.g. large cap industrials e.g.). So the return of that index of securities will not be a direct measure for the return of any one security. but by being a proxy viz. it can approximately tell you where a large cap industrial security might be headed in terms of returns. hope u understand …

#4

If an index is composed of 50 specific stocks, isn’t it a direct measure of those 50 stocks? In this case, isn’t it not a proxy, but a direct indicator of those stocks’ returns?

Thank you for your response by the way, I really appreciate it!

#5

It would be a direct measure of a portfolio containing those 50 stocks in exactly those proportions, but not of any of the individual stocks, nor of any portfolio holding those stocks in different proportions.

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#6

OK, I have a pretty clear picture of what they want now. Thank you very much.

#7

My pleasure.