Reading 37: security market indexes Flashcards
Choices that must be made when constructing a security market index least likely include whether to:
use a nominal or interval scale.
measure the performance of an entire market or market segment.
weight the securities equally or by some firm-specific characteristic.
To be useful, a security market index must have a numerical value. Selecting the target market and determining the weighting method are among the choices that must be made when constructing a securities index. (LOS 37.a, 37.c)
The 1-year return on a price-weighted index of these three stocks is closest to:
12.5%.
13.5%.
18.0%.
Chart:
stock a: $22, 1500, $28, 1500
stock b: $40, 10000, $50, 10000
stock c: $34, 3000, $30, 3000
Jan 1 Dec 31
22+40+34/3=32, 28=50=30/3=36
(36/32)-1=0.125
The 1-year return on an equal-weighted index of these three stocks is closest to:
12.0%.
12.5%.
13.5%.
Chart:
stock a: $22, 1500, $28, 1500
stock b: $40, 10000, $50, 10000
stock c: $34, 3000, $30, 3000
Jan 1 Dec 31
The 1-year return on a market capitalization-weighted index of these stocks is closest to:
12.5%.
13.5%.
18.0%.
Chart:
stock a: $22, 1500, $28, 1500
stock b: $40, 10000, $50, 10000
stock c: $34, 3000, $30, 3000
Jan 1 Dec 31
total portfolio value Jan 1
22(1500)+40(10000)+34(3000)= $535000
total portfolio value Dec 31
28(1500)+50(10000)+30(3000)= $632000
(632/535)-1= 0.1813
632/535 x 100= 118.13
Market float of a stock is best described as its:
total outstanding shares.
shares that are available to domestic investors.
outstanding shares, excluding those held by controlling shareholders.
Market float represents shares available to the investing public and excludes shares held by controlling shareholders. Free float is a narrower measure that also excludes shares that are not available to foreign investors. (LOS 37.d)
For which of the following indexes will rebalancing occur most frequently?
A price-weighted index.
An equal-weighted index.
A market capitalization-weighted index.
An equal-weighted index will be rebalanced most frequently because as stock prices change, their representation in the index needs to be adjusted. Price-weighted and market capitalization-weighted indexes do not usually need rebalancing. (LOS 37.d)
The publisher of an index that includes 50 corporate bonds removes from the index three bonds that are nearing maturity and one whose issuer has defaulted and selects four actively traded bonds to replace them in the index. This bond index is said to have been:
redefined.
rebalanced.
reconstituted.
Changing the constituent securities of an index is referred to as reconstituting the index. Rebalancing refers to adjusting the index weights to their target levels. (LOS 37.f)
Which of the following would most likely represent an inappropriate use of an index?
As a reflection of market sentiment.
Comparing a small-cap manager against a broad market.
Using the CAPM to determine the expected return and beta.
Comparing a small-cap manager against a broad market would be an inappropriate use of an index. A benchmark should be consistent with the manager’s investment approach and style. A manager’s performance will depend to a large degree on its chosen style. (LOS 37.g)
An index of 200 mid-cap growth stocks is best described as:
a style index.
a sector index.
a broad market index.
An index for mid-cap growth stocks is best described as a style index. Sector indexes typically measure returns for a specific industry or sector of the economy (e.g., utilities or financial services firms). (LOS 37.h)
Which of the following is least accurate regarding fixed-income indexes?
Replicating the return on a fixed-income security index is difficult for investors.
There is a great deal of heterogeneity in the composition of fixed-income security indexes.
Due to the large universe of fixed-income security issues, data for fixed-income securities are relatively easy to obtain.
Fixed-income securities are largely traded by dealers and trade infrequently. Data are therefore difficult to obtain. (LOS 37.j)
Which of the following indexes of alternative investments is most likely to be calculated from derivatives prices?
Real estate index.
Commodity index.
Hedge fund index.
Commodity indexes are typically calculated from prices of commodity futures contracts. (LOS 37.k)
Most of the widely used global security indexes are:
price weighted.
equal weighted.
market capitalization weighted.
Most global security indexes are market capitalization-weighted with a float adjustment to reflect the amount of shares available to investors. (LOS 37.i)
