Security Market Indices

1. As time passes, the total return index will most likely be:

A. Greater in value than the price return index by a decreasing amount.B. Lower in value than the price return index by an increasing amount.C. Greater in value than the price return index by an increasing amount.

Use the following information to answer Questions 2 to 7:

An analyst gathered the following information regarding an equity market index which was created on 1 January 2009 and consists of the following 4 securities:

Securities Price at 31 Dec 2009 ($) Price at 31 Dec

2010 ($) Dividend paid ($) Weight in the

index

A 31 35 2 25%

B 42 48 1 35%

C 27 32 1 20%

D 22 24 3 20%

Assume that dividends are paid at the end of the year.

The following information is also available:

Price return in 2009 = 10.25% Total return in 2009 = 15.75%

2. The price return on Security A in 2010 is closest to:

A. 19.35% B. 16.13% C. 12.90%

3. The total return on Security C in 2010 is closest to:

A. 18.52% B. 29.63% C. 22.22%

4. The price return on the index in 2010 is closest to:

A. 13.75% B. 19.66% C. 17.75%

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5. The total return on the index in 2010 is closest to:

A. 15.25% B. 17.75% C. 19.66%

6. Given that the index value at inception was 1,000, the values of the price return index at the end of 2009 and 2010 are closest to:

2009 2010

A 1,137.50 1,293.91

B 1,102.50 1,254.09

C 1,102.50 1,137.50

7. Given that the index value at inception was 1,000, the values of the total return index at the end of 2009 and 2010 are closest to:

2009 2010

A 1,157.50 1,385.06

B 1,196.60 1,431.85

C 1,157.50 1,431.85

8. The first decision that an index provider must make when conducting an index is most likely:

A. Security selection B. Allocation of weight to each security C. Identification of the target market

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9. Which of the following statements regarding the construction of an index is least accurate?

A. It must consist of all the securities in the target market.B. The target market may be based on asset class or the exchange on which the securities

are traded. C. The number of securities in the index may be fixed or variable.

Use the following information relating to a price-weighted equity index to answer Questions 10 to 14:

Security Shares in index Price at the end of

2009 Price at the end of

2010 Dividends per

share

A 2 46 53 0.2

B 2 55 51 0.4

C 2 36 42 0.1

Assume that all dividend payments are made at the end of the year.

10. The weight of Security B in the index at 31 December 2010 is closest to:

A. 33.58% B. 40.15% C. 34.93%

11. The weight of Security C in the index at 31 December 2009 is closest to:

A. 28.77% B. 26.28% C. 36.30%

12. Given that the index divisor is set to 3, the value of the index at 31 December 2010 is closest to:

A. 292B. 97.33C. 48.67

13. The price return on the index is closest to:

A. 7.08%B. 6.57%C. 7.80%

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14. The total return on the index is closest to:

A. 8.07%B. 7.60%C. 7.08%

Use the following information regarding equal-weighted equity index to answer Questions 15 to 19:

Security Price at the end of 2009 Price at the end of

2010 Dividends per

share

A 20 25 0.5

B 50 45 0.2

C 31.25 36 0.4

D 100 135 0.5

Assume that all dividend payments are made at the end of the year.

Note: The dollar value of the index at 31 December 2009 is $10,000 and using a divisor of 10, the index level equals 1,000.

15. The number of shares of Security C in the index at 31 December 2009 is closest to:

A. 80B. 50C. 125

16. The weight of Security B in the index at 31 December 2010 is closest to:

A. 18.55% B. 25.00% C. 19.35%

17. The value of the index at 31 December 2010 is closest to:

A. 11,630 B. 10,000 C. 1,163

18. The price return on the index is closest to:

A. 16.30% B. 17.47% C. 17.90%

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19. The total return on the index is closest to:

A. 17.47% B. 18.57% C. 17.90%

Use the following information relating to a market-capitalization-weighted equity index to answer Questions 20 to 24:

Security Shares outstanding Price at the end of

2009 Price at the end of

2010 Dividends per

share

A 4,000 30 36 0.85

B 12,000 25 21 2.15

C 7,000 40 47 1.12

Assume that all dividend payments are made at the end of the year.

20. The weight of Security A in the index at 31 December 2010 is closest to:

A. 19.86% B. 17.14% C. 18.27%

21. The weight of Security C in the index at 31 December 2009 is closest to:

A. 45.38% B. 40.00% C. 42.86%

22. Given a divisor of 700, the value of the price-return index at 31 December 2010 is closest to:

A. 1,000B. 1,125.21 C. 1,035.71

23. The price return on Security B is closest to:

A. 3.57%B. -16%C. 20%

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24. The total return on the index is closest to:

A. 8.86%B. 3.57%C. 7.50%

Use the following information relating to a float-adjusted-market-capitalization-weighted equity index to answer Questions 25 to 30:

Security Shares outstanding

% of shares inthe market

float

Price at the endof 2009

Price at the endof 2010

Dividends per share

A 20,000 41% 42 38 0.85

B 15,000 37% 54 51 2.15

C 20,000 53% 27 35 1.12

Assume that all dividend payments are made at the end of the year.

25. The number of shares of Security C in the index at 31 December 2010 is closest to:

A. 10,600 B. 20,000 C. 8,200

26. The float-adjusted market capitalization of Security A at 31 December 2009 is closest to:

A. $311,600 B. $344,400 C. $286,200

27. The weight of Security B in the index at 31 December 2010 is closest to:

A. 29.31% B. 32.22% C. 37.02%

28. Given that the index value at 31 December 2009 was 1,000, the value of the price-return index at 31 December 2010 is closest to:

A. 1,038B. 965.65 C. 1,124.17

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29. The price return on the index is closest to:

A. 3.80%B. 5.11%C. 4.28%

30. The total return on the index is closest to:

A. 5.11%B. 6.22%C. 7.11%

31. Consider the following statements:

Statement 1: The price return of a market-capitalization-weighted equity index will be lower than that of an equal-weighted equity index if large-cap stocks underperform.

Statement 2: The divisor in a price-weighted equity index typically equals the number of shares of each constituent security in the index.

Which of the following is most likely?

A. Only Statement 1 is incorrect.B. Only Statement 2 is incorrect.C. Both statements are correct.

32. A market-capitalization-weighted equity index most likely:

A. Results in arbitrary weights for each security.B. Leads to a lower ratio of book value to market value as compared to a fundamentally-

weighted index. C. Assigns a lower weight to a security whose price is relatively low.

33. A fundamental-weighted index based on the earnings yield most likely:

A. Follows a momentum trading strategy.B. Assigns a higher weight to securities whose prices have risen.C. Assigns a higher weight to securities with a higher earnings yield.

34. Which of the following indices least likely requires rebalancing?

A. Market-capitalization-weighted indicesB. Price-weighted indicesC. Equal-weighted indices

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