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LOS a: Discuss the need for float adjustment in the construction of international equity benchmarks.
Q1. Which of the following is a valid reason for the need for float adjustment in the construction of international equity benchmarks as compared to US equity benchmarks?
A) The proportion of free float of market capitalization is higher for international equity benchmarks as compared to US equity benchmarks.
B) The crossholding of the benchmark in the US is lower than the crossholding in international markets.
C) The proportion of free float of market capitalization is lower for international equity benchmarks as compared to US equity benchmarks.
Q2. A small, developing country has just developed an organized stock exchange where several dozen firms of all sizes trade. Craig Aversa has gathered data for the companies on the exchange and plans to construct an index using a sample of the firms that he feels are representative of the stocks that trade on the exchange and the country’s economy. He meets with Jamie Weir who has experience in creating country indexes. As they begin, Aversa says that he will develop a strict set of guidelines for determining which firms to include in the index. Weir says that the guidelines should be published so that the index may be used more effectively and efficiently as a trading tool.
As Aversa does his research, he uncovers some issues that may lead to potential problems. Many of the firms that are traded on the exchange and would be good candidates for inclusion in the index have large positions that are owned by a controlling family and will probably not be actively traded for the foreseeable future. Several of the firms own positions, ranging from 5 to 20%, of another company on the exchange. When Weir proposes the creation of a value-weighted index based upon capitalization, Aversa says that such an index may have weights that are not representative of the actual value of the shares in the companies that are available for trading. Weir acknowledges Aversa’s concerns and computes a float adjustment that will increase the value of shares trading for each company to better reflect their tradable value.
Aversa decides to construct the index using 10 firms. For the index, Aversa decides to use the firm with the largest capitalization from each of the four major industries in the country. He will then rank the remaining firms by size and choose the six firms with the largest capitalization from that list. In so doing, he feels that he is striking an appropriate balance. One advantage of this method is that it turns out the gap, in terms of capitalization, between the sixth firm on the second list and the seventh firm, is fairly large. Thus, Aversa feels the criteria for selection will minimize the likelihood that the component firms in the index will have to change in the near future.
Weir says that Aversa may still need to monitor the amount of the float adjustment. Aversa says he plans to employ a precise float adjustment. Weir says it may be more practical to create acceptable ranges for the stocks that approximate the true free float. As long as the free float is within the band, they will not adjust the index.
With respect to their approach to creating the guidelines:
A) Weir is proposing objectivity and Aversa is proposing transparency.
B) Aversa is proposing objectivity and Weir is proposing transparency.
C) Weir is proposing judgment and Aversa is proposing transparency.
Q3. Among the potential problems that Aversa discovered is:
A) cross hedging.
B) cross holding.
C) crossing.
Q4. With respect to Aversa’s concern about problems of using a value-weighted index and Weir’s solution:
A) Aversa’s concern is justified, but Weir’s solution is wrong.
B) Aversa’s concern is unjustified, and Weir’s solution is unwarranted.
C) Aversa’s concern is justified, and Weir’s solution is appropriate.
Q5. In determining his criteria for the number of firms to select based upon size, Aversa is striking a balance between:
A) objectivity and judgment.
B) liquidity and crossing opportunities.
C) breadth and investability.
Q6. If Aversa’s assessment that the component firms in his index will probably not change in the near future is CORRECT:
A) there will be lower index reconstitution effects.
B) there will be lower float adjustment effects.
C) there will be more breadth.
Q7. With respect to Aversa’s proposal for rebalancing and Weir’s suggestion, Aversa’s proposal will lead to:
A) high transactions costs, but Weir’s suggestion is not a practical solution.
B) low transactions costs, so Weir’s suggestion is not relevant.
C) high transactions costs, and Weir’s suggestion is a practical solution.
Q8. Float adjustment is needed for international equity benchmarks because the international equity indices are:
A) market cap weighted and the float is higher due to cross-holdings.
B) float weighted and the float is lower due to cross-holdings.
C) market cap weighted and the float is lower due to cross-holdings.
Q9. Market cap weighted indices as compared to float adjusted indices give:
A) higher weight to lower float companies with small cross-holdings of shares.
B) lower weight to higher float companies with large cross-holdings of shares.
C) higher weight to lower float companies with large cross-holdings of shares. | 
发表于 2009-3-10 17:47
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