Chapter 04 – Security Market Indexes and Index Funds
1. The general purpose of a market indicator series is to provide an overall indication of aggregate market changes or
movements.
a.
True
b.
False
2. An aggregate market index can be used as a benchmark to judge the performance of professional money managers.
a.
True
b.
False
3. When constructing an index, a small percentage of the total population will provide valid indications of the behavior of
the total population if the sample is properly selected.
a.
True
b.
False
4. A price weighted series is disproportionately influenced by larger capitalization companies.
a.
True
b.
False
Chapter 04 – Security Market Indexes and Index Funds
5. The Dow Jones Industrial Average is a value weighted average.
a.
True
b.
False
6. A two for one stock split causes the divisor in a price-weighted series to decline.
a.
True
b.
False
7. The Dow Jones Industrial Average has been criticized for being blue-chip biased.
a.
True
b.
False
8. Unlike the Dow Jones Industrial Average, the Nikkei-Dow Jones Average is price weighted.
a.
True
b.
False
9. A value weighted index automatically adjusts for stock splits.
a.
True
b.
False
10. The New York Stock Exchange Index is based on a sample of all of the New York Stock Exchange stocks.
a.
True
b.
False
11. An equally weighted indicator series is also known as an unweighted indicator series.
a.
True
b.
False
12. The Standard & Poor’s 500 index is an example of a value weighted index.
a.
True
b.
False
13. The Standard & Poor’s International Index consists of three international, 19 national, and 38 international industry
indexes.
a.
True
b.
False
14. A price-weighted index such as the DJIA is a geometric mean of current stock prices.
a.
True
b.
False
15. The Morgan Stanley group index for Europe, Australia, and the Far East (EAFE) is a price weighted index.
a.
True
b.
False
16. The major U.S. stock indexes are highly correlated.
a.
True
b.
False
17. To solve comparability problems across countries, global equity indexes with consistent sample selection, weighting,
Chapter 04 – Security Market Indexes and Index Funds
and computational procedures have been developed.
a.
True
b.
False
18. Bond-market indicator series have been around much longer than stock-market indicator series.
a.
True
b.
False
19. It is easier to construct an indicator series for bonds because of their relatively stable returns pattern.
a.
True
b.
False
20. A bond market index is easier to create than a stock market index because the universe of bonds is much broader than
that of stocks.
a.
True
Chapter 04 – Security Market Indexes and Index Funds
b.
False
21. The correlations among the U.S. investment-grade-bond series were very high because all rates of return for
investment-grade bonds over time are impacted by common macroeconomic variables.
a.
True
b.
False
22. There are no composite series currently available that will measure the performance of all securities (i.e. stocks and
bonds) in a given country.
a.
True
b.
False
23. The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.
a.
True
b.
False
Chapter 04 – Security Market Indexes and Index Funds
24. There is a high correlation between the Wilshire 5000 index and the alternative NYSE series (S&P 500 and the
NYSE), which represents the substantial influence of large NYSE stocks on the Wilshire 5000 index.
a.
True
b.
False
25. The low correlations between the U.S. and Japan confirm the benefit of global diversification.
a.
True
b.
False
26. The most common way to test a portfolio manager’s performance is to compare the portfolio return to a benchmark.
a.
True
b.
False
27. A benchmark measures the performance by portfolio managers.
a.
True
b.
False
28. For an indexed portfolio, the fund manager will typically attempt to replicate the composition of the particular index
exactly.
a.
True
b.
False
29. Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and
cash flows of securities held by financial institutions.
a.
True
b.
False
30. Which of the following is NOT a use of security market indicator series?
a.
b.
c.
d.
e.
31. A properly selected sample for use in constructing a market indicator series will consider the sample’s source, size,
and
a.
breadth.
b.
average beta.
c.
value.
d.
variability.
e.
dividend record.
32. In a price weighted average stock market indicator series, the following type of stock has the greatest influence:
a.
the stock with the highest price.
b.
the stock with the lowest price.
Chapter 04 – Security Market Indexes and Index Funds
c.
the stock with the highest market capitalization.
d.
the stock with the lowest market capitalization.
e.
the stock with the highest P/E ratio.
33. What effect does a stock substitution or stock split have on a price-weighted series?
a.
Index remains the same; divisor will increase/decrease.
b.
Divisor remains the same; index will increase/decrease.
c.
Index and divisor will both remain the same.
d.
Index and divisor will both reflect the changes (immediately).
e.
None of these are correct.
34. Which of the following is NOT a value-weighted series?
a.
NASDAQ Industrial Index
b.
Dow Jones Industrial Average
c.
Wilshire 5000 Equity Index
d.
American Stock Exchange Series
e.
NASDAQ Composite Index
35. An example of a value weighted stock market indicator series is the
a.
Dow Jones Industrial Average.
b.
Nikkei Dow Jones Average.
c.
S & P 500 Index.
d.
Value Line Index.
e.
Shearson Lehman Hutton Index.
36. In a value weighted index,
a.
exchange rate fluctuations have a large impact.
b.
exchange rate fluctuations have a small impact.
c.
large companies have a disproportionate influence on the index.
d.
small companies have an exaggerated effect on the index.
e.
None of these are correct.
37. Of the following indices, which includes the most comprehensive list of stocks?
a.
New York Exchange Index
b.
Standard and Poor’s Index
c.
American Stock Exchange Index
d.
NASDAQ Series Index
e.
Wilshire Equity Index
Chapter 04 – Security Market Indexes and Index Funds
38. The Value Line Composite Average is calculated using the ____ of percentage price changes.
a.
arithmetic average
b.
harmonic average
c.
expected value
d.
geometric average
e.
logarithmic average
39. Which of the following is NOT a global equity indicator series?
a.
Morgan Stanley Capital International Indexes
b.
Dow Jones World Stock Index
c.
FT/S & P-Actuaries World Indexes
d.
Merrill Lynch-Wilshire World Indexes
e.
Brinson Partner Global Security Market Index (GSMI)
40. Which is an example of a Style Index?
a.
small-cap growth
b.
mid-cap value
c.
small-cap value
d.
mid-cap growth
e.
All of these are correct.
41. Index movements are influenced by differential prices of the components in a(n)
a.
equally-weighted index.
b.
price-weighted index.
c.
unweighted index.
d.
value-weighted index.
e.
over-weighted index.
42. A style index created to track ethical funds is known as the
a.
green index.
b.
SRI index.
c.
EAFE index.
d.
freedom index.
e.
ethical index.
43. Which index is created by first deriving the initial total market value of all stocks used in the index?
a.
equally-weighted index.
b.
price-weighted index.
c.
unweighted index.
d.
value-weighted index.
e.
over-weighted index.
44. The actual index movements are typically based on the arithmetic mean of the percent changes in price or value for
the stocks in the
a.
equally-weighted index.
b.
price-weighted index.
c.
unweighted index.
d.
value-weighted index.
e.
over-weighted index.
45. Which of the fundamental factors was NOT used in the Fundamental Index created by Research Affiliates, Inc.?
a.
sales
b.
profits (cash flow)
Chapter 04 – Security Market Indexes and Index Funds
c.
leverage (debt/equity)
d.
net assets (book value)
e.
dividends
Exhibit 4.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Number of shares
Closing Prices
(per share)
Companies
outstanding
Day T
Day T + 1
1
2,000
$30.00
$25.00
2
7,000
55.00
60.00
3
5,000
20.00
25.00
4
4,000
40.00
45.00
46. Refer to Exhibit 4.1. Assume that a stock price-weighted indicator consisted of the four issues with their prices. What
are the values of the stock indicator for Day T and T + 1, and what is the percentage change?
a.
36.25, 38.75, 6.9 percent
b.
38.75, 36.25, −6.9 percent
c.
100, 106.9, 6.9 percent
d.
107.48, 106.33, 1.15 percent
e.
106.9, 100, 5.7 percent
47. Refer to Exhibit 4.1. For a value-weighted series, assume that Day T is the base period and the base value is 100.
What is the new index value for Day T + 1, and what is the percentage change in the index from Day T?
a.
106.33, 6.33 percent
Chapter 04 – Security Market Indexes and Index Funds
b.
107.48, 7.48 percent
c.
109.93, 9.93 percent
d.
108.7, 8.7 percent
e.
107.56, 7.3 percent
48. Refer to Exhibit 4.1. Compute an unweighted price indicator series, using geometric means. What is the percentage
change in the index from Day T to Day T+1? Assume a base index value of 100 on Day T.
a.
5.35 percent
b.
7.48 percent
c.
9.93 percent
d.
6.33 percent
e.
0 percent
Exhibit 4.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stock Price
# Shares
X
Y
Z
X
Y
Z
Jan. 13, 2005
20
40
30
1000
2000
1000*
Jan. 14, 2005
25
42
18
1000
2000
2000
Jan. 15, 2005
27
45
8
1000**
2000
2000
Jan. 16, 2005
20
40
10
3000
2000
2000
*2:1 Split on Stock Z after Close on Jan. 13, 2005
**3:1 Split on Stock X after Close on Jan. 15, 2005
The base date for index calculations is January 13, 2005
49. Refer to Exhibit 4.2. Calculate a price weighted average for January 13th.
a.
32
b.
30
c.
36.13
d.
34
e.
56
50. Refer to Exhibit 4.2. What is the divisor at the beginning of January 14th?
a.
3.0
b.
2.5
c.
2.2734
d.
1.9375
e.
3.2852
51. Refer to Exhibit 4.2. Calculate a price weighted average for January 14th.
a.
32
b.
30
c.
36.13
d.
34
e.
37