Reading 53: Security-Market Indexes - LOS a(part 2)～ Q5-8

investment, statements, following, number, adjust

Q5. Which of the following statements about indexes is TRUE?

A) A price-weighted index assumes an equal number of shares (one of each stock) represented in the index.

B) A market weighted series must adjust the denominator to reflect stock splits in the sample over time.

C) An unweighted index assumes a proportionate market value investment in each company in the index.

Q6. The table below lists information on price per share and shares outstanding for three companies–Lair Enterprises, Kurlew, Inc., and Mowe, Ltd.

	As of Beginning of Year		As of End of Year
Stock	Price Per Share ($)	# Shares Outstanding	Price Per Share ($)	# Shares Outstanding
Lair	15	10,000	10	10,000
Kurlew	45	5,000	60	5,000
Mowe	90	500	110	500

Assume that at the beginning of the year, the value of the market-weighted index was 100. The one-year return on the market-weighted index is closest to:

A) 30.0%.

B) 13.33%.

C) 8.33%.

Q7. If the stocks in the table above are used to create a stock market index, it is least likely that:

A) a price-weighted index will have a downward bias compared to a value-weighted index.

B) an investor creating a price-weighted index using these three stocks would need to rebalance his portfolio at year-end to reflect the price changes.

C) a 5% change in the price of Kurlew would have a greater impact on a value-weighted index than a 5% change in the prices of either Lair or Mowe.

Q8. Tamber Benz, CFA, recently joined Bay Area Investment Group as a personal financial planner. Today, she has a meeting with a client interested in equity index funds, with a particular interest in learning about the source and direction of biases. In preparation for this meeting, she makes some quick notes (relying on her memory). These notes are listed below. She then finds her well-worn CFA study notes and checks her memory. After reviewing her notes, which of the following choices does she determine is least accurate?

A) A market value-weighted index, such as the New York Stock Exchange Index, accurately reflects the impact of price changes on wealth.

B) The Dow Jones Industrial Index has a built-in downward bias.

C) An index such as the Valueline Composite Average is constructed by purchasing an equal number of shares of each stock in the index, and will have a downward bias when geometric averaging is used to compute the return.