6.

02 Security Market Indexes

Question 1
The following price-weighted index data is for one year:

The total return of the index is closest to:

A. 5.8%
B. 7.5%
C. 12.5%

Question 2
A fundamentally weighted index is constructed using the following data, with earnings yield as
the weighting factor:

If the initial value of the index is €1,000, the value of Asset Z in the index is closest to:
A. €277
B. €333
C. €351

Question 3
An analyst compiles the following data about a market-capitalization-weighted index with a
beginning index value of €1,000:
The value of Asset X in the index at the beginning of the period is closest to:
A. €230
B. €333
C. €439

Question 4
Which of the following is most likely characteristic of fixed income index construction?
A. Fixed income indexes are more costly and difficult to replicate than equity indexes.
B. A small number of securities can precisely replicate a given fixed income universe.
C. Due to the size and liquidity of the bond market, there is ample price transparency.

Question 5
An analyst gathers the following data about a value-weighted index:

The price return of the index is closest to:

A. −2.1%
B. −1.5%
C. −1.1%

Question 6
An analyst has gathered the following information about a market-capitalization-weighted index:
The price return of the index is closest to:
A. 33%
B. 35%
C. 55%

Question 7
Of the following, one disadvantage of price weighting a security index is that price weighting:
A. leads to indexes with an inherent value tilt.
B. does not reflect securities' market capitalization.
C. is complex and difficult to apply to index creation.

Question 8
Reconstituting an index most likely causes the highest turnover of securities in a(n):
A. price-weighted index.
B. equal-weighted index.
C. market-cap-weighted index.

Question 9
An analyst has gathered the following data about the stocks included in an equal-weighted
index with a beginning value of €1,200:

The price return for the equal-weighted index during the period is closest to:
A. 16.7%
B. 19.3%
C. 20.4%

Question 10
An analyst gathers the following data about an equal-weighted index:
The price return of the index is closest to:
A. 7.8%
B. 12.5%
C. 16.8%

Question 11
A given equity index consists of stocks of consumer durable companies. The companies
represented in this index are from different countries and include large-, mid-, and small-cap
companies. This type of index is most appropriately categorized as a:
A. style index.
B. sector index.
C. broad market index.

Question 12
Which of the following best describes an aggregate fixed-income index? The index includes:
A. all bonds outstanding regardless of type, maturity, or credit quality.
B. only exchange-traded bonds regardless of type, maturity, or credit quality.
C. a representative sample of bonds regardless of type, maturity, or credit quality.

Question 13
The following market-capitalization-weighted index data is for one year:

The index's total return for the year is closest to:

A. 7.0%
B. 14.5%
C. 24.1%
Question 14
Survivorship bias is most likely a concern when analyzing indexes of:
A. hedge funds.
B. commodities.
C. real estate investment trusts.

Question 15
An equal-weighted index is constructed using the following three assets:

The initial value of the index is €1,200. The number of shares of Asset Z initially included in the
index is closest to:
A. 5 shares.
B. 8 shares.
C. 10 shares.

Question 16
A global index includes both growth and value technology stocks, with constituent companies
that range in size from small to large cap. This index is best described as a:
A. style index.
B. sector index.
C. multimarket index.

Question 17
The following securities make up a price-weighted index:

If the divisor is 2.5, the index value at the beginning of the period is closest to:
A. €82.67
B. €85.76
C. €99.20
Question 18
In managing a security market index, reconstitution most likely refers to changing:
A. the index's weighting method.
B. the securities that make up the index.
C. the weights of the securities in the index.

Question 19
Three equity indexes hold the same 30 securities, but they are weighted differently in each
index. Over the past year, the total returns of the indexes were:

The best explanation for this performance difference is:

A. large-cap and value outperformance.
B. small-cap and value outperformance.
C. large-cap and momentum outperformance.

Question 20
Once a security market index has been established, rebalancing is most likely a concern for
a(n):
A. price-weighted index.
B. equal-weighted index.
C. market-cap-weighted index.

Question 21
In comparison to equity indexes, fixed-income indexes are most likely harder to construct and
replicate since fixed-income securities:
A. are less liquid than equity securities.
B. need to be tracked with futures contracts.
C. do not accurately track styles and sectors.

Question 22
An analyst gathers the following information on the constituents of a price-weighted index:
Based on this information, the index's price return is closest to:
A. 5.0%
B. 6.3%
C. 7.5%

Question 23
An analyst wants to calculate the total return of an index comprising the following assets:

The total return of the index is closest to:

A. 7.4%
B. 8.6%
C. 10.4%

Question 24
Value tilt is most likely to impact equity indexes that are:
A. price weighted.
B. fundamentally weighted.
C. market capitalization weighted.

Question 25
Assume that a capitalization-weighted (cap-weighted) equity index and an equal-weighted
equity index have the same constituent stocks. All else being equal, if the cap-weighted index
had a greater one-year price return, the most appropriate conclusion is that large-cap stocks:
A. outperformed small-cap stocks.
B. underperformed small-cap stocks only.
C. underperformed small- and medium-cap stocks.
Question 26
All else being equal, a decrease in the value of a price-weighted stock index most likely results
when the value of its constituent company shares decreases due to a:
A. reconstitution.
B. constituent company's stock splits.
C. constituent company decreasing its cash dividend.

Question 27
An index starts with a value of 100 and has the following returns over 3 years:

If the index value is based on its total return, then its value at the end of Year 3 is closest to:
A. 113.50
B. 113.75
C. 113.87

Question 28
A mutual fund whose holdings are selected from a wide range of small-cap stocks compares its
performance each year with that of the Russell 2000 Index. This is most likely an example of
using a market index as a:
A. benchmark for an actively managed portfolio.
B. proxy for the small-cap asset class in an asset allocation model.
C. way to understand market sentiment regarding small-cap stocks.

Question 29
A style index would most likely contain which of the following constituents?
A. The smallest 200 stocks in a region
B. All consumer goods companies within a country
C. A representation of indexes from countries deemed emerging markets

Question 30
Which of the following best describes the difference between the returns of a commodity index
based on futures prices and the returns of the same commodities based on spot prices?
A. The difference can be substantial.
B. The difference is the risk-free rate.
C. There is no effective difference due to arbitrage.
Question 31
The divisor used to calculate the value of a price-weighted stock index is most appropriately
adjusted if a constituent company's stock:
A. splits.
B. appreciates.
C. pays a cash dividend.

Question 32
Which of the following best describes security market indexes? Security market indexes:
A. are valued no more often than daily.
B. can only be valued using actual asset prices.
C. represent a security market, market segment, or asset class.

Question 33
An exchange-traded fund (ETF) has been created to replicate the performance of a broad
market index. In the design of the ETF, the index was most likely used as a:
A. model portfolio.
B. asset class proxy.
C. performance benchmark.

Question 34
An analyst uses the return on the Tokyo Stock Price Index over the last 10 years as an input to
the CAPM to determine the expected return of a stock. This is an example of using a securities
market index as a(n):
A. indicator of market sentiment.
B. model portfolio for investment products.
C. proxy to model risk, return, or risk-adjusted performance.

Question 35
Two market-cap weighted indexes are created with the same stocks and stock weights, one as
a total return index and one as a price return index. If the stocks repurchase shares instead of
paying dividends, after 1 year, which index will most likely have the greater return?
A. The total return index
B. The price return index
C. The indexes will have the same return

Question 36
Changing the constituent stocks in a broad market index to reflect changes in the relative
economic importance of different industry sectors is best described as a:
A. rebalancing.
B. reconstitution.
C. reorganization.
Question 37
An analyst designing a security market index who wants to minimize the need to actively
rebalance the index would most appropriately choose:
A. price weighting.
B. equal weighting.
C. float-adjusted market-capitalization weighting.

Question 38
The weight of individual stocks in a float-adjusted market capitalization–weighted index is most
likely based on:
A. shares sold to investors through public offerings.
B. issued shares less shares repurchased by the company.
C. outstanding shares less shares owned by controlling shareholders.

Question 39
The performance of which of the following indexes for alternative investments is most likely to
reflect the spot prices of the asset class it represents?
A. Hedge fund index
B. Commodities index
C. Real estate investment trust index