A security market index represents the:
risk of a security market.
security market as a whole.
security market, market segment, or asset
... [Show More] class.
C is correct. A security market index represents the value of a given security market, market segment, or asset class.
Security market indices are:
constructed and managed like a portfolio of securities.
simple interchangeable tools for measuring the returns of different asset classes.
valued on a regular basis using the actual market prices of the constituent securities.
A is correct. Security market indices are constructed and managed like a portfolio of securities.
When creating a security market index, an index provider must first determine the:
target market.
appropriate weighting method.
number of constituent securities.
A is correct. The first decision is identifying the target market that the index is intended to represent because the target market determines the investment universe and the securities available for inclusion in the index.
One month after inception, the price return version and total return version of a single index (consisting of identical securities and weights) will be equal if:
market prices have not changed.
capital gains are offset by capital losses.
the securities do not pay dividends or interest.
C is correct. The difference between a price return index and a total return index consisting of identical securities and weights is the income generated over time by the underlying securities. If the securities in the index do not generate income, both indices will be identical in value.
The values of a price return index and a total return index consisting of identical equal-weighted dividend-paying equities will be equal:
only at inception.
at inception and on rebalancing dates.
at inception and on reconstitution dates.
A is correct. At inception, the values of the price return and total return versions of an index are equal.
An analyst gathers the following information for an equal-weighted index comprised of assets Able, Baker, and Charlie:
Security Beginning of
Period Price (€) End of Period
Price (€) Total
Dividends (€)
Able 10.00 12.00 0.75
Baker 20.00 19.00 1.00
Charlie 30.00 30.00 2.00
The price return of the index is:
1.7%.
5.0%.
11.4%.
B is correct. The price return is the sum of the weighted returns of each security. The return of Able is 20 percent [(12 - 10)/10]; of Baker is -5 percent [(19 - 20)/20]; and of Charlie is 0 percent [(30 - 30)/30]. The price return index assigns a weight of 1/3 to each asset; therefore, the price return is 1/3 × [20% + (-5%) + 0%] = 5%.
An analyst gathers the following information for an equal-weighted index comprised of assets Able, Baker, and Charlie:
Security Beginning of
Period Price (€) End of Period
Price (€) Total
Dividends (€)
Able 10.00 12.00 0.75
Baker 20.00 19.00 1.00
Charlie 30.00 30.00 2.00
The total return of the index is:
5.0%.
7.9%.
11.4%.
C is correct. The total return of an index is calculated on the basis of the change in price of the underlying securities plus the sum of income received or the sum of the weighted total returns of each security. The total return of Able is 27.5 percent; of Baker is 0 percent; and of Charlie is 6.7 percent:
Able: (12 - 10 + 0.75)/10 = 27.5%
Baker: (19 - 20 + 1)/20 = 0%
Charlie: (30 - 30 + 2)/30 = 6.7%
An equal-weighted index applies the same weight (1/3) to each security's return; therefore, the total return = 1/3 × (27.5% + 0% + 6.7%) = 11.4%.
An analyst gathers the following information for a price-weighted index comprised of securities ABC, DEF, and GHI:
Security Beginning of
Period Price (£) End of Period
Price (£) Total
Dividends (£)
ABC 25.00 27.00 1.00
DEF 35.00 25.00 1.50
GHI 15.00 16.00 1.00
The price return of the index is:
-4.6%.
-9.3%.
-13.9%.
B is correct. The price return of the price-weighted index is the percentage change in price of the index: (68 - 75)/75 = -9.33%.
Security Beginning of Period
Price (£) End of Period
Price (£)
ABC 25.00 27.00
DEF 35.00 25.00
GHI 15.00 16.00
TOTAL 75.00 68.00
An analyst gathers the following information for a market-capitalization-weighted index comprised of securities MNO, QRS, and XYZ:
Security Beginning of
Period Price (¥) End of Period
Price (¥) Dividends
per Share (¥) Shares
Outstanding
MNO 2,500 2,700 100 5,000
QRS 3,500 2,500 150 7,500
XYZ 1,500 1,600 100 10,000
The price return of the index is:
-9.33%.
-10.23%.
-13.90%.
B is correct. The price return of the index is (48,250,000 - 53,750,000)/53,750,000 = -10.23%.
Security Beginning of Period Price (¥) Shares Outstanding Beginning of Period Value (¥) End of Period Price (¥) End of Period Value (¥)
MNO 2,500 5,000 12,500,000 2,700 13,500,000
QRS 3,500 7,500 26,250,000 2,500 18,750,000
XYZ 1,500 10,000 15,000,000 1,600 16,000,000
Total 53,750,000 48,250,000
An analyst gathers the following information for a market-capitalization-weighted index comprised of securities MNO, QRS, and XYZ:
Security Beginning of
Period Price (¥) End of Period
Price (¥) Dividends
Per Share (¥) Shares
Outstanding
MNO 2,500 2,700 100 5,000
QRS 3,500 2,500 150 7,500
XYZ 1,500 1,600 100 10,000
The total return of the index is:
1.04%.
-5.35%.
-10.23%.
B is correct. The total return of the market-capitalization-weighted index is calculated below:
Security Beginning of Period Value (¥) End of Period Value (¥) Total
Dividends (¥) Total Return (%)
MNO 12,500,000 13,500,000 500,000 12.00
QRS 26,250,000 18,750,000 1,125,000 -24.29
XYZ 15,000,000 16,000,000 1,000,000 13.33
Total 53,750,000 48,250,000 2,625,000 -5.35
When creating a security market index, the target market:
determines the investment universe.
is usually a broadly defined asset class.
determines the number of securities to be included in the index.
A is correct. The target market determines the investment universe and the securities available for inclusion in the index.
An analyst gathers the following data for a price-weighted index:
Beginning of Period End of Period
Security Price (€) Shares Price (€) Shares
A 20.00 300 22.00 300
B 50.00 300 48.00 300
C 26.00 2,000 30.00 2,000
The price return of the index over the period is:
4.2%.
7.1%.
21.4%.
A is correct. The sum of prices at the beginning of the period is 96; the sum at the end of the period is 100. Regardless of the divisor, the price return is 100/96 - 1 = 0.042 or 4.2 percent.
An analyst gathers the following data for a value-weighted index:
Beginning of Period End of Period
Security Price (£) Shares Price (£) Shares
A 20.00 300 22.00 300
B 50.00 300 48.00 300
C 26.00 2,000 30.00 2,000
The return on the value-weighted index over the period is:
7.1%.
11.0%.
21.4%.
B is correct. It is the percentage change in the market value over the period:
Market value at beginning of period: (20 × 300) + (50 × 300) + (26 × 2,000) = 73,000
Market value at end of period: (22 × 300) + (48 × 300) + (30 × 2,000) = 81,000
Percentage change is 81,000/73,000 - 1 = 0.1096 or 11.0 percent with rounding.
An analyst gathers the following data for an equally-weighted index:
Beginning of Period End of Period
Security Price (¥) Shares Price (¥) Shares
A 20.00 300 22.00 300
B 50.00 300 48.00 300
C 26.00 2,000 30.00 2,000
The return on the index over the period is:
4.2%.
6.8%.
7.1%.
C is correct. With an equal-weighted index, the same amount is invested in each security. Assuming $1,000 is invested in each of the three stocks, the index value is $3,000 at the beginning of the period and the following number of shares is purchased for each stock:
Security A: 50 shares
Security B: 20 shares
Security C: 38.46 shares.
Using the prices at the beginning of the period for each security, the index value at the end of the period is $3,213.8: ($22 × 50) + ($48 × 20) + ($30 × 38.46). The price return is $3,213.8/$3,000 - 1 = 7.1%.
Which of the following index weighting methods requires an adjustment to the divisor after a stock split?
Price weighting.
Fundamental weighting.
Market-capitalization weighting.
A is correct. In the price weighting method, the divisor must be adjusted so the index value immediately after the split is the same as the index value immediately prior to the split.
If the price return of an equal-weighted index exceeds that of a market-capitalization-weighted index comprised of the same securities, the most likely explanation is:
stock splits.
dividend distributions.
outperformance of small-market-capitalization sto
C is correct. The main source of return differences arises from outperformance of small-cap securities or underperformance of large-cap securities. In an equal-weighted index, securities that constitute the largest fraction of the market are underrepresented and securities that constitute only a small fraction of the market are overrepresented. Thus, higher equal-weighted index returns will occur if the smaller-cap equities outperform the larger-cap equities.
A float-adjusted market-capitalization-weighted index weights each of its constituent securities by its price and:
its trading volume.
the number of its shares outstanding.
the number of its shares available to the investing public.
C is correct. "Float" is the number of shares available for public trading.
Which of the following index weighting methods is most likely subject to a value tilt?
Equal weighting.
Fundamental weighting.
Market-capitalization weighting.
B is correct. Fundamental weighting leads to indices that have a value tilt.
Rebalancing an index is the process of periodically adjusting the constituent:
securities' weights to optimize investment performance.
securities to maintain consistency with the target market.
securities' weights to maintain consistency with the index's weighting method.
C is correct. Rebalancing refers to adjusting the weights of constituent securities in an index to maintain consistency with the index's weighting method.
Which of the following index weighting methods requires the most frequent rebalancing?
Price weighting.
Equal weighting.
Market-capitalization weighting.
B is correct. Changing market prices will cause weights that were initially equal to become unequal, thus requiring rebalancing. [Show Less]