Gypsy

Contreras Fund is a mutual fund that invests in value stocks. The most appropriate type of equity index to use as a benchmark of manager performance for Contreras Fund is a:

A) sector index.

B) style index.

C) broad market index.

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The index selected as a benchmark for manager performance should represent the investment universe from which the manager actually selects stocks. If the manager only invests in value stocks, then the most appropriate index is a style index that seeks to represent the returns from a value strategy. A sector index is appropriate for managers who invest in specific sectors (e.g., technology stocks, emerging market bonds).

Gypsy

An equity index comprised of value stocks, identified by their price-to-earnings ratios, is best described as a:

A) style index.

B) sector index.

C) fundamental weighted index.

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An index of value stocks is an example of a style index. Sector indexes measure the performance of securities in specific industries or industry sectors. Fundamental weighting is used to weight indexes by a factor such as the size of the firms or economies represented in the index.

Gypsy

Which type of security market index provides a measure of a market’s overall performance and usually contains a significant portion of the market’s total value?

A) Broad market indexes.

B) Sector indexes.

C) Style indexes.

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A broad market index typically consists of securities that represent 90% or more of the total market capitalization for a given market. The object of a broad market index is to provide a measure for the performance of the total market. A sector index measures the returns for an industry sector such as financials. Style indexes measure the returns to strategies that are differentiated by market capitalization and by value or growth.

Gypsy

The Top Banking Index contains stocks in the finance industry that represent more than 90% of the total market capitalization for the finance industry. The index is best described as a:

A) broad market index.

B) sector index.

C) style index.

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A sector index measures the returns for an industry sector such as financials. Style indexes measure the returns to strategies that are differentiated by market capitalization and by value or growth. A broad market index typically consists of constituent securities that represent 90% or more of the total market capitalization for a given market.

Gypsy

Which of the following regarding bond market indexes is least accurate?

A) Unlike stocks, bonds lack continuous price trading data.

B) The bond universe is more stable than the stock universe.

C) There are more bond issues than stocks.

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One reason why the creation of a bond index is more difficult than a stock index is due to the fact that the universe of bonds is constantly changing because of numerous new issues, bond maturities, calls, and bond sinking funds.

Gypsy

Which of the following is NOT a reason bond market indexes are more difficult to create than stock market indexes?

A) The universe of bonds is much broader than that of stocks.

B) Bond deviations tend to be relatively constant.

C) There is a lack of continuous trade data available for bonds.

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Bond prices are quite volatile as measured by the bond’s duration.

Gypsy

Commodity price indexes are based on the prices of:

A) futures contracts.

B) real assets such as grains, oil, and precious metals.

C) commodities.

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The constituent securities of commodity price indexes are commodity futures contracts. As a result, the return on a commodity index can be different than the returns from holding the constituent commodities themselves.

Gypsy

Which of the following statements is most accurate regarding commodity indexes?

A) Weighting methodology varies among index providers and leads to differences in index risk and returns.

B) Commodity indexes are based on spot prices, while most investors purchase futures contracts.

C) The return to commodity indexes consists of two major components: the risk-free rate of return and the roll yield.

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Weighting methodology is a major issue for commodity indexes. Several different methodologies are used, including equal weighting and global production values. Differences in weighting cause differing exposures for the indexes and lead to different risk and return profiles.
Commodity indexes represent futures contracts on commodities, not the actual spot prices of commodities. Commodity index returns come from three sources: the risk-free rate of return, changes in futures prices, and the roll yield.

Gypsy

Voluntary reporting of performance by hedge fund managers leads to:

A) an upward bias in hedge fund index returns.

B) a downward bias in hedge fund index returns.

C) no appreciable bias in hedge fund index returns.

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Empirical studies have shown that since hedge fund managers have the option to report performance results only funds with good results will report. Since funds with poor performance do not report their results, the results of hedge fund indexes will be biased upwards.

Gypsy

Which of the following indexes is a price weighted index?

A) The New York Stock Exchange Index.

B) The Nikkei Dow Index.

C) The Standard and Poor's Index.

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The Nikkei Dow Index is a price-weighted index. The other two are market value-weighted indexes.