Calculate the composite index for the following portfolio having CPI weight = 80% and SPI weight = 20% Larger image
Correct Answer: C
Explanation
Composite Index CI = [prioritized NPV] * [(CPI * CPI weight + SPI * SPI weight)] = [NPV / sum(NPVs)] *
[(CPI * CPI weight + SPI * SPI weight)]; when NPV is not present in the calculation, CI = (CPI * CPI weight
+ SPI * SPI weight). The following tables detail the calculation process.
For this example, and given the table in the question, you start by:
Calculating the NPV / sum(NPVs) for each component, in addition to (CPI * CPI weight + SPI * SPI weight) for each component. You will get the first table below.
What you do next is multiply both the calculated columns together for each row to get the composite index of each component to complete the formula previously cited. You will get the second table below.
The portfolio composite index is the summation of the composite indexes of each component; it reflects the overall performance of the portfolio. The composite index is 1 based on the above calculations.
This is a very important question for the exam and it occurs on nearly each and every exam. There is no information on this in the standard. We have included everything you need to know about the composite index and its validation in our QB