Question 1

Ian Clive, CFA, is analyzing two different equity indices: Metric 500 and Neo 100. Metric
contains securities that have a market capitalization of above $100 million, and Neo
contains the smallest 1,000 stocks in the market. Based solely on the information given,
which of the following best represents the classification of the equity indices?
Metric 500 Neo 100
A. Broad market index Sector index
B. Style index Style index
C. Market capitalization index Sector index
a) Row A
b) Row B
c) Row C

Question 2
Cue 100 is an equity index representing all industries in a market. The stocks are selected
based on a ranking system whereby those stocks with low price-to-book ratios, low price-to-
earnings ratios, and high dividend yields are rated higher. Stocks may need to be reclassified
over time based on the changing ratios. Based on the given information, Cue 100 will most
likely be classified as a:
a) Style index.
b) Multimarket index.
c) Broad market index.

Question 3
A security market index had an inception value of 1,000 and price returns of 4% and 5% for
Periods 1 and 2, respectively. The index yields an additional 1 percent return from the
income in Period 1 and an additional 2 percent return from the income in Period 2. The
value of the price return index for Period 2 would be closest to:
a) 1,050.
b) 1,102.
c) 1,092.

Question 4
A commodity index is most likely to be constructed based on:
a) Spot prices of commodities.
b) Prices of futures contracts on commodities.
c) Prices that oil and gas, mining, and agricultural companies sell their production for.

Question 5
Compute for the total return of this market-capitalization-weighted index:
 Security Price, Beginning Price, Ending Shares Outstanding Total Dividends
Dawn 74 80 1,250 2.00
Dusk 74 67 3,250 5.00
Twilight 74 87 2,000 0.00
a) 3.89%
b) 6.00%
c) 6.13%

Question 6
Security-market indices are least likely to be used for:
a) Constructing index funds.
b) Computing specific risk of portfolios.
c) Benchmarks, to measure the performance of portfolios.

Question 7
An index weighting method that frequently calls for rebalancing is:
a) Risk-adjusted return weighting.
b) Equal weighting.

Question 8
The type of equity index in which the index weight of a country that previously gave high
stock returns is prevented from overweighting is a:
a) Multimarket index with fundamental weighting
b) Multimarket index
c) Styled multimarket index

Question 9
Use the following information regarding an equal-weighted equity index
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 on December 31, 2009 is $10,000 and using a divisor of
10, the index level equals 1,000.
The number of shares of Security C in the index on December 31, 2009 is closest to:
a) 80
b) 50
c) 125
Question 10
John Smith, CFA, wants to know the return of the index in a year. No changes happened in
the shares outstanding, and market-capitalization is employed. He gathers the following
information:
Security Beg, Price End, Price Shares
AX1 56 50 800
BY2 58 64 1,300
CZ3 31 32 500
The return on the index over the period is:
a) 2.57%
b) 3.82%
c) 4.49%

Question 11
An index is comprised of the following assets:
Security Price, Beginning Price, Ending Total Dividends
Dawn 74 80 2.00
Dusk 74 82 5.00
Twilight 74 87 0.00
The price return of the index is:
a) 14.44%
b) 12.16%
c) 10.84%

Question 12
A security analyst gathers the following data for a price-weighted index composed of
securities CBA, FED, AND IHG:
Investment Beginning of the Period Price ($) End of the Period Price ($) Total Dividends
($)
CBA 25.00 27.00 1.00
FED 35.00 25.00 1.50
IHG 5.00 20.00 1.00
The price return of the index is:
a) 2.5%
b) 5.7%
c) 10.8%

Question 13
There are two stocks, ABC and XYZ, included in an equal-weighted index and the following
data is provided:
 Stock Number of Shares Price at End of 2015 Price at End of 2016
ABC 10,000 $25.00 $30.00
XYZ 50,000 $35.00 $36.75
The increase in the index over 2016 is closest to:
a) 11.25%.
b) 12.25%.
c) 12.50%.

Question 14
Bodoni Investments Group is in the process of constructing and managing a security market
index. It has identified the target market and the securities to be included in the index.
Which of the following is the most likely sequence of events and decisions that the group
undertakes to finish the process?
a) Fundamental weighting, float-adjusted market-capitalization weighting, and
rebalancing.
b) Float-adjusted market-capitalization weighting, rebalancing, and reconstitution.
c) Index weighting, rebalancing, and index turnover.

Question 15
Nathalie Johnson, a financial analyst, has collected the following information on a
fundamental-weighted index based on earnings, which has three securities, with one
security for each of its constituents:

• Stock A has market capitalization of $1,400, and it has a price-

earnings ratio (P/E) of 20.
• Stock B has market capitalization of $800, and it has a P/E of 10.
• Stock C has market capitalization of $1,500, and it has a P/E of 25.

Compared to a value-weighted index, a fundamental-weighted index will least likely assign:

a) A lower-weight to Stock A.
b) A higher-weight to Stock B.
c) A higher-weight to Stock C.

Question 16
Use the following information relating to a float-adjusted market-capitalization-weighted
equity index
Price at the Price at the
Shares % of Shares in the Dividends per
Security End of 2009 End of 2010
Outstanding Market Float 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.
The number of shares of Security C in the index on December 31, 2010 is closest to:
a) 10,600
b) 20,000
c) 8,200

Question 17
Use the following information relating to a market-capitalization-weighted equity index:
Shares Price at the End of Price at the End of Dividends per
Security
Outstanding 2009 ($) 2010 ($) 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.
The total return on the index is closest to:
a) 8.86%
b) 3.57%
c) 7.50%

Question 18
Which of the following is the correct classification of activities in the construction and
management of a security market index?
Construction Management
A. Target market selection Security governance
B. Index weighting Reconstitution
C. Security selection Index weighting
a) Row A
b) Row B
c) Row C

Question 19
Of the following equity index weighting methods, which one is most likely subject to a value
stock bias?
a) Equal weighting.
b) Fundamental weighting.
c) Market-capitalization weighting.

Question 20
There are three shares—A, B, and C—in a price-weighted index, and the following
information is given:
 Share Price Number of Shares Outstanding
A $50 100,000
B $100 40,000
C $75 10,000
If the share price of A doubles and the share prices of B and C remain unchanged, then the
index will rise by:
a) 22.22%.
b) 33.33%.
c) 44.44%.

Question 21
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.

Question 22
Use the following information relating to a price-weighted equity index
Shares in Price at the End of Price at the End of Dividends per Share
Security
Index 2009 ($) 2010 ($) ($)
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.
The weight of Security B in the index on December 31, 2010 is closest to:
a) 33.58%
b) 40.15%
c) 34.93%

Question 23
Use the following information regarding an equal-weighted equity index
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 on December 31, 2009 is $10,000 and using a divisor of
10, the index level equals 1,000.
The value of the index on December 31, 2010 is closest to:
 a) 11,630
b) 10,000
c) 1,163

Question 24
With regard to fixed-income indices, which of the following is most accurate?
a) Liquidity issues make it difficult for investors to easily replicate fixed-income
indices.
b) Rebalancing and reconstitution are the only sources of turnover in fixed-income
indices.
c) Fixed-income indices representing the same target market hold similar numbers
of bonds.

Question 25
The following table lists the prices of the stocks of a price-weighted market index, which
includes four stocks:
Securities Price ($)
A 35
B 65
C 60
D 40
Stock C issues a three-for-one stock split. What would be the index divisor after the stock
split?
a) 4.00.
b) 3.20.
c) 3.60.

Question 26
A float-adjusted market-capitalization weighting index means that companies:
a) Where the founder still holds a significant stake will have a lower weighting in
the index than they would in a pure market-capitalization-weighted index.
b) Where there is very active trading in the companies' shares will have a higher
weighting in the index than they would in a pure market-capitalization-weighted
index.
c) Where the number of issued shares is significantly less than the number of
authorized shares will have a lower weighting in the index than they would in a
pure market-capitalization-weighted index.

Question 27
An aggregate fixed-income index:
a) comprises corporate and asset-backed securities, exclusively.
 b) represents the market for government-issued securities.
c) can be subdivided by economic or market sector to create more narrowly defined
indices.

Question 28
Which one of the following would not be a use for a market index?
a) A measure of active return.
b) Basis for new investment products.
c) Benchmark for evaluating portfolio performance.

Question 29
In Japan, if the share price of a company with a small market capitalization, that is, in both
the price-weighted Nikkei Stock Average and the market-capitalization-weighted TOPIX
index, rises sharply, then:
a) The TOPIX index will rise by more than the Nikkei Stock Average index
b) The Nikkei Stock Average index will rise by more than the TOPIX index
c) There is insufficient information to determine which index will rise the most.

Question 30
An analyst gathered the following information regarding an equity market index that was
created on January 1, 2009 and consists of the following four securities:
Price at December 31, Price at December 31, Dividend Paid Weight in the
Securities
2009 ($) 2010 ($) ($) 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%
The price return on Security A in 2010 is closest to:
a) 19.35%
b) 16.13%
c) 12.90%

Question 31
You are asked to do the work of an index provider for a client. Which of the following should
you determine first in constructing a portfolio of securities?
a) Target market of the securities in the index
b) Allocation or weights of securities in the index
 c) List of securities passing a specific performance parameter

Question 32
Real estate investment trust indices can most likely be categorized as:
a) Multi-market indices.
b) Appraisal indices.
c) Price-weighted indices.

Question 33
Which of the following indices uses the price weighting method for index weighting?
a) Dow Jones Industrial Average.
b) Barclays Capital Global Aggregate Bond Index.
c) TOPIX.

Question 34
Of the following, which is not a real estate index category?
a) Appraisal index.
b) Initial sales index.
c) Repeat sales index.

Question 35
Which one of the following is not an index weighting method?
a) Price weighting.
b) Fundamental weighting.
c) Portfolio weighting.

Question 36
Which of the following index weighting methods requires the least frequent rebalancing?
a) Equal-weighted indices, as they assign an equal weight to each constituent security.
b) Value-weighted indices, as they automatically adjust for stock splits and stock
dividends.
c) Fundamental-weighted indices, as they use weighing measures independent of
security prices.

Question 37
Which of the following statements regarding commodity indices is least accurate?
a) Different commodity indices may have very different risk and return profiles.
b) Commodity indices do not have an obvious weighting method.
c) Commodity indices consist of physical commodities.
Question 38
Which of the following indices least likely requires rebalancing?
a) Market-capitalization-weighted indices
b) Price-weighted indices
c) Equal-weighted indices

Question 39
An analyst gathers the following information for an equal-weighted index composed of
assets Alpha, Beta, and Gamma:
Investment Beginning of the Period Price ($) End of the Period Price ($) Total Dividends
($)
Alpha 10.00 12.00 0.75
Beta 20.00 21.00 1.00
Gamma 30.00 33.00 2.00
The price return of the index is:
a) 1.7%
b) 11.4%
c) 11.7%

Question 40
Which of the following statements regarding commodity indices is false?
a) Commodity indices vary significantly in their risk and return characteristics,
depending on the commodities in the index.
b) Commodity prices are set by the market value of the commodities when they are
bought at present.
c) Taking a long position in a commodity is the same as a commodity index in terms of
the return on the investment.

Question 41
Use the following information regarding an equal-weighted equity index
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 on December 31, 2009 is $10,000 and using a divisor of
10, the index level equals 1,000.
The weight of Security B in the index on December 31, 2010 is closest to:
a) 18.55%
 b) 25.00%
c) 19.35%

Question 42
Security market indices are used as:
a) proxies for risk-free assets.
b) proxies to measure unsytemmatic risk.
c) proxies for specific asset classes in asset allocation models.

Question 43
Which statement incorrectly describes hedge fund indices?
a) Hedge funds are private investment vehicles wherein traders can take long and
short positions for investment strategies. They are often leveraged.
b) Most of the hedge fund indices are value weighted.
c) There is a risk for hedge funds indices to have inaccurate performance
representation because they are unregulated and no strict reporting standards are
implemented.

Question 44
Which of the following statements about fixed income indices is least accurate?
a) One challenge in the fixed-income markets is that it is predominantly a dealer
market.
b) Equity securities outnumber fixed-income securities.
c) Because trade is not frequently happening in fixed-income markets, securities are
relatively illiquid.

Question 45
Use the following information relating to a market-capitalization-weighted equity index:
Shares Price at the End of Price at the End of Dividends per
Security
Outstanding 2009 ($) 2010 ($) 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.
The weight of Security C in the index on December 31, 2009 is closest to:
a) 45.38%
b) 40.00%
c) 42.86%

Question 46
Use the following information relating to a market-capitalization-weighted equity index:
 Shares Price at the End of Price at the End of Dividends per
Security
Outstanding 2009 ($) 2010 ($) 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.
The price return on Security B is closest to:
a) 3.57%
b) −16%
c) 20%

Question 47
Which of the following statements regarding price-weighted indices is least accurate?
a) The index computation will be straight forward.
b) Each of the stocks in the index has an equal weight.
c) Constituent companies with high share prices will have a big influence on
the index performance.

Question 48
Alan Alexander is in the process of constructing an equity market index constituting five
securities that share similar risk and return profiles. Alan is pondering over which index
weighting method to use for the index.
Ileana Johns, Alan's senior colleague, has little experience in security market indices.
However, she suggested the following options to Alan:

• Equal-weighted index where each constituent security is given an

identical weight in the index at inception.
• Sector index weighting method made of securities representing a
particular economic sector that shares identical risk and return
profiles.
• Float-adjusted market-capitalization weighting where securities are
held in proportion to their value in the target market.

Alan is keen to avoid frequent rebalancing of the index. For the index weighting process,
Alan is most likely to adopt:
a) The equal weighting method.
b) The sector index weighting method.
c) The float-adjusted market-capitalization weighting method.

Question 49
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.

Question 50
A total return security market index reflects:
a) only the price changes of the constituent securities within the index.
b) only the reinvested cash flows since the index began.
c) the price changes and cumulative cash flows since the index began.

Question 51
Which of the following is not a use of market indices?
a) Measure of systematic risk
b) Provide information regarding market sentiment
c) Proxy for asset classes in asset allocation models

Question 52
An analyst gathered the following information regarding an equity market index that was
created on January 1, 2009 and consists of the following four securities:
Price at December 31, Price at December 31, Dividend Paid Weight in the
Securities
2009 ($) 2010 ($) ($) Index
A 31 35 2 25%
B 42 48 1 35%
C 27 32 1 20%
D 22 24 3 20%
Assume that dividends are paid at the end of the year.
The following information is also available:
Price return in 2009 = 10.25%
Total return in 2009 = 15.75%
Given that the index value at inception was 1,000, the values of the price return index at the
end of 2009 and 2010 are closest to:
2009 ($) 2010 ($)
A 1,137.50 1,293.91
B 1,102.50 1,254.09
C 1,102.50 1,137.50
a) Row A
b) Row B
 c) Row C

Question 53
How does the fundamental weighting address the disadvantages of market-capitalization-
weighted index?
a) By reducing the weight of securities that have outperformed and vice versa.
b) By adjusting the market capitalization of each constituent security for its market float.
c) By using measures of a company's size that are independent of the constituent
security's price.

Question 54
An index calculated using the freely floating shares is most likely to be:
Index Construction Shares Included
A. Price-weighted index Authorized shares
B. Price-weighted index Fully paid-up shares
C. Market-capitalization- Shares held by weighted index independent investors
a) Row A
b) Row B
c) Row C

Question 55
Which of the following statements are true?
a) Dow Jones Industrial Average Index and HFRX Global Hedge Fund Index are both
price-weighted indices.
b) Nikkei Stock Average and the Financial Times Ordinary Share Index are both equal-
weighted indices.
c) Barclays Capital Global Aggregate Bond Index is market-capitalization-weighted.

Question 56
Use the following information relating to a market-capitalization-weighted equity index:
Shares Price at the End of Price at the End of Dividends per
Security
Outstanding 2009 ($) 2010 ($) 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.
The weight of Security A in the index on December 31, 2010 is closest to:
a) 19.86%
b) 17.14%
c) 18.27%
Question 57
Which of the following is best associated with an aggregated fixed-income index?
a) Comprises corporate and asset-backed securities only
b) Composed of Treasury securities only
c) Is represented by fixed-income securities in different classifications

Question 58
Use the following information relating to a float-adjusted market-capitalization-weighted
equity index
Price at the Price at the
Shares % of Shares in the Dividends per
Security End of 2009 End of 2010
Outstanding Market Float 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.
The total return on the index is closest to:
a) 5.11%
b) 6.22%
c) 7.11%

Question 59
Survivorship bias is likely to lead to:
a) Lack of consistency between each hedge fund index's reported returns.
b) Poor-performing hedge funds being excluded from hedge fund indices' performance.
c) Hedge fund indices understating the performance that investors in hedge funds
actually received.

Question 60
An analyst gathered the following information regarding an equity market index that was
created on January 1, 2009 and consists of the following four securities:
Price at December 31, Price at December 31, Dividend Paid Weight in the
Securities
2009 ($) 2010 ($) ($) 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%
The price return on the index in 2010 is closest to:
a) 13.75%
b) 19.66%
c) 17.75%

Question 61
Use the following information relating to a market-capitalization-weighted equity index:
Shares Price at the End of Price at the End of Dividends per
Security
Outstanding 2009 ($) 2010 ($) 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.
Given a divisor of 700, the value of the price return index on December 31, 2010 is closest
to:
a) 1,000
b) 1,125.21
c) 1,035.71

Question 62
Which of the following least describes the fundamental weighting of indices?
a) There may be a tilt in the value of the constituent security because the measure/ratio
used to weight the assets is way higher or lower than its market capitalization weight.
b) The weighting used in fundamental weighting is independent of the price of the
security.
c) This method has a momentum effect because those that increased in relative value will
get even higher weights moving forward.

Question 63
Use the following information relating to a float-adjusted market-capitalization-weighted
equity index
Price at the Price at the
Shares % of Shares in the Dividends per
Security End of 2009 End of 2010
Outstanding Market Float 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.
The float-adjusted market capitalization of Security A on December 31, 2009 is closest to:
a) $311,600
 b) $344,400
c) $286,200

Question 64
Which of the following statements is most accurate with respect to fixed-income indices?
a) Liquidity issues make it difficult for investors to easily replicate fixed-income
indices.
b) Rebalancing and reconstitution are the only sources of turnover in fixed-income
indices.
c) Fixed-income indices representing the same target market hold similar numbers of
bonds.

Question 65
Which of the following is not a classification used by MSCI Barra to group countries in its
multimarket indices?
a) Level of economic development
b) Key services or products offered
c) Geographic region

Question 66
Which of the following statements regarding commodity indices is most accurate?

• Statement I: The performance of commodity indices may differ from

that of the underlying commodities.
• Statement II: They do not have an obvious weighting method so
index providers create their own weighting methods.
• Statement III: Unlike broad equity and fixed-income indices,
commodity indices that target the same markets share similar risk
and return profiles.

•
a) Statements I and II.

b) Statements I and III.

c) Statements II and III.

Question 67
What is meant when a security market index is rebalanced?
a) The weights of constituent securities are adjusted to maintain consistency with the
index's weighting method.
b) The selection of constituent securities is adjusted to maintain consistency with the
target market.
c) The constituent securities weights are adjusted to optimize investment returns.
Question 68
Use the following information relating to a price-weighted equity index
Shares in Price at the End of Price at the End of Dividends per Share
Security
Index 2009 ($) 2010 ($) ($)
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.
The total return on the index is closest to:
a) 8.07%
b) 7.60%
c) 7.08%

Question 69
Use the following information regarding an equal-weighted equity index
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 on December 31, 2009 is $10,000 and using a divisor of
10, the index level equals 1,000.
The total return on the index is closest to:
a) 17.47%
b) 18.57%
c) 17.90%

Question 70
Commodity index values are based on:
a) futures contract prices.
b) the market price of the specific commodity.
c) the average market price of a basket of similar commodities.

Question 71
An equal-weighted equity index consists of five securities with an initial value of $10,000.
The prices of these securities at the end of 2010 and 2011 are as follows:
Securities 2010 ($) 2011 ($)
A 64 67
B 40 45
 Securities 2010 ($) 2011 ($)
C 50 52
D 45 48
E 80 80
Calculate the price return of the index for 2011.
a) 4.66%.
b) 2.92%.
c) 5.57%.

Question 72
Use the following information relating to a float-adjusted market-capitalization-weighted
equity index
Price at the Price at the
Shares % of Shares in the Dividends per
Security End of 2009 End of 2010
Outstanding Market Float 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.
The price return on the index is closest to:
a) 3.80%
b) 5.11%
c) 4.28%

Question 73
An analyst has collected the following information on a float-adjusted market-capitalization-
weighted equity index:
Securities BOP ($) EOP ($) Shares Outstanding Shares Held by Controlling Shareholders
A 64 67 6,000 60%
B 40 45 4,000 70%
C 50 52 2,000 80%
D 45 48 3,000 40%
If a simple market-capitalization method is used instead of the float-adjusted method at
BOP, the weight of:
a) Security A in the index will be higher.
b) Security B in the index will be higher.
c) Security C in the index will be lower.

Question 74
Use the following information relating to a price-weighted equity index
 Shares in Price at the End of Price at the End of Dividends per Share
Security
Index 2009 ($) 2010 ($) ($)
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.
The weight of Security C in the index on December 31, 2009 is closest to:
a) 28.77%
b) 26.28%
c) 36.30%

Question 75
Michael Starc, CFA, constructed an equal-weighted index from five securities at the
beginning of Period 1. The beginning index portfolio value was 5,000. The following
information relates to the initial period of the index:
Security Beginning Price Dividends per Share Ending Price
A 8.00 0.00 10.00
B 12.50 2.00 10.00
C 40.00 5.00 50.00
D 25.00 5.00 20.00
E 50.00 2.00 40.00
Michael rebalances the index at the beginning of the next period. Which of the following
statements is most accurate about the index?
a) The rebalancing will decrease the number of Security B shares in the index.
b) The rebalancing will increase the weight of Security C in the index.
c) The weight of Security D would have been lower in Period 2 if price weighting were
used.

Question 76
Two indices contain exactly the same stocks; one is a market-capitalization-weighted index
that increased by 12%, whereas the other is an equal-weighted index that increased by 5%
over the same period. This is explained by which of the following?
a) There were a large number of stock splits over the period.
b) There were a small number of stock splits over the period.
c) Large-capitalization stocks outperformed small-capitalization stocks.

Question 77
Which of the following is least likely a challenge in the construction of a fixed-income index?
a) Fixed-income securities are relatively illiquid.
b) The universe of bonds is relatively constant.
 c) The number of fixed-income securities is quite large.

Question 78
Which of the following statements regarding broad market indices is most accurate?
Broad market indices:
a) Represent groups of securities classified according to market capitalization, value,
growth, or a combination of these characteristics.
b) Track different economic sectors and can be aggregated to represent the equivalent of
multimarket indices.
c) Constitute securities representing typically more than 90% of the selected market.

Question 79
Which of the following is an example of a style index?
a) A geographically based index.
b) An economic sector based index.
c) A market capitalization based index.

Question 80
Use the following information relating to a float-adjusted, market-capitalization-weighted
equity index
Price at the Price at the
Shares % of Shares in the Dividends per
Security End of 2009 End of 2010
Outstanding Market Float 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.
Given that the index value on December 31, 2009 was 1,000, the value of the price return
index at December 31, 2010 is closest to:
a) 1,038
b) 965.65
c) 1,124.17

Question 81
Which of the following statements concerning a price-weighted index is most accurate?
a) The index automatically adjusts for a stock split by leaving the security weighting
unchanged.
b) When there is a stock split of a constituent security, the security's weighting in the
index will be reduced.
c) When there is a stock split of a constituent security, the index will fall reflecting
the security's price decline.
Question 82
A security market index is defined as a single measure that consolidates information and
reflects the performance of an entire:
a) industry.
b) economy.
c) security market.

Question 83
Value tilt happens in which of the following methods of index weighting?
a) Asset weighting
b) Fundamental weighting
c) Value weighting

Question 84
Regarding commodity indices, which of the following is most accurate?
a) They all share similar weighting methods.
b) The ones containing the same underlying commodities offer similar returns.
c) Their performance can be very different from that of the underlying commodities.

Question 85
An equity analyst aggregates the following data for an equal-weighted index composed of
three securities Alpha, Beta, and Gamma:
Beginning of the Period Price End of the Period Price Total Dividends
Investment ($) ($) ($)
Alpha 10.00 12.00 0.75
Beta 20.00 19.00 1.00
Gamma 30.00 30.00 2.00
The price return for the index is closest to:
a) 1.70%
b) 5.00%
c) 11.40%

Question 86
Which of the following is least likely to make the computation of bond market indices more
complex than stock market indices in the United States?
a) Difficulties in establishing prices for bonds.
b) The universe of bonds is constantly changing due to the volume of new issues and
bonds reaching maturity.
c) Investors receive a higher percentage of their return from coupon income from
bonds than they receive from dividends with equities.
Question 87
Use the following information relating to a price-weighted equity index
Shares in Price at the End of Price at the End of Dividends per Share
Security
Index 2009 ($) 2010 ($) ($)
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.
The price return on the index is closest to:
a) 7.08%
b) 6.57%
c) 7.80%

Question 88
A public pension fund investment committee is analyzing the performance of managers
within their portfolios. Which of the following equity indices would not be used in this type
of analysis?
a) Broad market indices.
b) Sector indices.
c) Style indices.

Question 89
Determine whether each of the following statements regarding equal-weighted indices are
true or false.

• Statement 1: Equal-weighted index requires frequent rebalancing of

the securities because prices change and the value that will be
equally weighted is changed.
• Statement 2: The effect of a high percentage return of a high-priced
stock is magnified by its greater weight.
• Statement 3: An index with 10 constituent securities allows a security
be given weight up to 10% of the value of the index.

•
a) True, true, true

b) True, false, true

c) False, false, false

Question 90
Use the following information relating to a float-adjusted market-capitalization-weighted
equity index
 Price at the Price at the
Shares % of Shares in the Dividends per
Security End of 2009 End of 2010
Outstanding Market Float 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.
The weight of Security B in the index on December 31, 2010 is closest to:
a) 29.31%
b) 32.22%
c) 37.02%

Question 91
Which one of the following is not an equity market index?
a) Broad market.
b) Multi-market.
c) Hedge fund.

Question 92
An analyst gathered the following information regarding an equity market index that was
created on January 1, 2009 and consists of the following four securities:
Price at December 31, Price at December 31, Dividend Paid Weight in the
Securities
2009 ($) 2010 ($) ($) 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%
The total return on the index in 2010 is closest to:
a) 15.25%
b) 17.75%
c) 19.66%

Question 93
Because of voluntary performance reporting to index providers, the returns of hedge fund
indices are most likely:
a) biased upward.
b) biased downward.
 c) similar across different index providers.

Question 94
An analyst gathers the following information for an equal-weighted index composed of
assets Alpha, Beta, and Gamma:
Investment Beginning of the Period Price ($) End of the Period Price ($) Total Dividends
($)
Alpha 10.00 12.00 0.75
Beta 20.00 21.00 1.00
Gamma 30.00 33.00 2.00
The total return of the index is:
a) 2.5%
b) 11.7%
c) 18.1%

Question 95
Which of the following statements regarding sector indices is most accurate? Sector indices:
a) track different economic sectors, which cannot be aggregated to represent the
equivalent of a broad market index.
b) provide a means to determine whether an active investment manager is more
successful at stock selection or sector allocation.
c) apply a universally recognized classification system to identify the constituent
securities of specific economic sectors.

Question 96
Rebalancing an index is the process of periodically adjusting the constituent:
a) securities' weights to optimize the investment performance.
b) securities to maintain consistency with the target market.
c) securities' weights to maintain consistency with the index's weighting method.

Question 97
An equal-weighted equity index consists of five securities with an initial value of $10,000.
The prices of these securities at the end of 2010 and 2011 are as follows:
Securities 2010 ($) 2011 ($)
A 64 67
B 40 45
C 50 52
D 45 48
E 80 80
Which of the following statements is most likely true of the movement of weights of the
constituent securities in 2011?
 a) The weight of Security C in the index will increase owing to an increase in its share
price.
b) The weight of Security A in the index will decrease owing to increases in other share
prices.
c) The weight of Security E in the index will remain the same, as it is an equal-weighted
equity index.

Question 98
What does a security market index represent?
a) The risk inherent in a security market.
b) Every stock for sale in the market.
c) The market for securities, a segment, or an asset class.

Question 99
Use the following information regarding an equal-weighted equity index
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 on December 31, 2009 is $10,000 and using a divisor of
10, the index level equals 1,000.
The price return on the index is closest to:
a) 16.30%
b) 17.47%
c) 17.90%

Question 100
Rebalancing of an index will occur most frequently for a(n):
a) Price-weighted index.
b) Equal-weighted index.
c) Market-capitalization-weighted index.

Question 101
An analyst gathers the following information for an equity index at the end of 2011 and
2012:
Securities 2011 ($) 2012 ($) Dividends ($)
A 35.00 38.00 1.00
B 22.00 24.00 1.25
C 30.00 35.00 1.75
 Securities 2011 ($) 2012 ($) Dividends ($)
D 44.00 42.00 0.50
The index consists of one share each of the four securities and uses the price weighting
method. Calculate the price return of the index for 2012.
a) 6.1%.
b) 13.7%.
c) 12.9%.

Question 102
Which of the following statements regarding equity indices is least accurate?
a) The aggregation of a sector index family is typically equivalent to a broad market index.
b) A broad equity market index represents an entire market.
c) Sector indices are designed to represent multiple security markets.

Question 103
In a price-weighted index, like the Dow Jones Industrial Average, the divisor is:
a) the sum of all the constituent security prices.
b) arbitrarily chosen at inception to give the index a value of 1,000.
c) periodically adjusted to reflect events like stock splits.

Question 104
In another index managed by Lai Zen, what is the equal-weighted index value if she assumes
an initial index value of 204.36?
Asset Initial Price ($) Current Price ($)
1 15.60 28.06
2 67.08 74.88
3 78.00 59.28
a) 210.43
b) 250.34
c) 263.47

Question 105
Commodity index returns least likely reflect:
a) Roll yield.
b) Risk-free interest rate.
c) Changes in actual prices.

Question 106
Since the hedge fund market is relatively unregulated compared to the equity and fixed-
income markets, a unique feature that has evolved for hedge fund indices is that they:
 a) are frequently equal weighted.
b) are determined by the constituents of the index.
c) reflect the value of private rather than public investments.

Question 107
The manager of the Chemical Index is using an equal-weighted index for simplicity purposes.
The index has three assets, Xenon, Ytterbium, and Zirconium. What is the price return of the
index given the following information?
Security Price, Beginning Price, Ending Total Dividends
Xenon 29.60 43.33 4.50
Ytterbium 59.20 68.78 11.25
Zirconium 66.60 81.45 9.75
a) 46.39%
b) 28.28%
c) 24.52%

Question 108
When creating a security market index, which one of the following would an index provider
not determine:
a) target market.
b) appropriate weighting method.
c) available databases with historical returns.

Question 109
An analyst gathered the following information regarding an equity market index that was
created on January 1, 2009 and consists of the following four securities:
Price at December 31, Price at December 31, Dividend Paid Weight in the
Securities
2009 ($) 2010 ($) ($) Index
A 31 35 2 25%
B 42 48 1 35%
C 27 32 1 20%
D 22 24 3 20%
Assume that dividends are paid at the end of the year.
The following information is also available:
Price return in 2009 = 10.25%
Total return in 2009 = 15.75%
The total return on Security C in 2010 is closest to:
a) 18.52%
b) 29.63%
c) 22.22%
Question 110
An analyst has collected the following information on a float-adjusted market-capitalization-
weighted equity index:
Securities BOP ($) EOP ($) Shares Outstanding Shares Held by Controlling Shareholders
A 64 67 6,000 60%
B 40 45 4,000 70%
C 50 52 2,000 80%
D 45 48 3,000 40%
The price return of the index for the period will be closest to:
a) 6.41%.
b) 6.55%.
c) 6.63%.

Question 111
Each of the constituents of a float-adjusted market-capitalization-weighted index is
weighted by its price and:
a) its trading volume.
b) the number of shares outstanding.
c) the number of its shares available to the investing public.

Question 112
Use the following information relating to a price-weighted equity index
Shares in Price at the End of Price at the End of Dividends per Share
Security
Index 2009 ($) 2010 ($) ($)
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.
Given that the index divisor is set to 3, the value of the index on December 31, 2010 is
closest to:
a) 292
b) 97.33
c) 48.67

Question 113
Although roughly similar in construction, the only time a price-return index and a total
return index consisting of identical equal-weighted, dividend-paying equities will be equal is
at:
a) inception.
b) inception and at periodic rebalancing dates.
 c) inception and at periodic reconstitution dates.

Question 114
Which of the following methods of weighting an index requires an adjustment to the divisor
when a stock splits?
a) Price weighting.
b) Fundamental weighting.
c) Market-capitalization weighting.

Question 115
An analyst gathers the following data for a market-capitalization-weighted index composed
of securities Smith, Jones, and Wang companies:
Beginning of End of Period Dividends per Shares
Security Period Price Price Share Outstanding
Smith 2,500 2,700 100 5,000
Jones 3,500 2,500 150 7,500
Wang 1,500 1,600 100 10,000
The price return of the index is closest to:
a) −9.33%
b) −10.23%
c) −13.90%

Question 116
Which of the following features distinguish commodity indices from equity and fixed-income
indices?
a) Most commodity indices include a variety of market sectors and credit ratings.
b) Commodity indices that target the same markets share very different risk and return
profiles.
c) Commodity indices generally have a much higher turnover than broad equity and
fixed-income indices.

Question 117
A market-capitalization-weighted index is made up of two stocks, X and Y, and the following
data is provided:
December 31, 2015 December 31, 2016
Stock Price Shares Outstanding Price Shares Outstanding
X $25 10,000 $15 20,000*
Y $50 6,000 $65 6,000
*After a 2-for-1 stock split.
The base index is set at 100 on December 31, 2015. The index on December 31, 2016 is
closest to:
 a) 98.18.
b) 125.45.
c) 126.67.

Question 118
Which of the following statements about the uses of security market indices is true?

• Statement 1: The performance of the index can be used to assess the

performance of an active portfolio manager
• Statement 2: Indices serve as means to create new investment
products.

•
a) Statement 1 is true.

b) Statement 2 is true.
c) Both statements are true.

Question 119
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.

Question 120
The process known as reconstitution of a security market index reduces:
a) portfolio turnover.
b) the need for rebalancing.
c) deviations from the target market.

Question 121
Which of the following is not a stated purpose of a market index?
a) They are used to track performance of various markets.
b) Investors use them to evaluate the performance of investment managers.
c) They form the basis of new government regulations for the investment industry.

Question 122 .
A price return security market index reflects:
a) only the price changes of the constituent securities within the index.
b) the price changes and dividends of the constituent securities within the index.
c) only the price increases associated with the constituent securities within the index.
Question 123
When a stock in a price-weighted index has a stock split, this will lead to the divisor:
a) Increasing.
b) Decreasing.
c) Increasing if the stock is a high-priced stock and falling if it is a low-priced stock.

Question 124
Consider the following statements:
Statement 1: Rebalancing creates turnover within an index.
Statement 2: In equal-weighted indices, the weights of securities that offer the lowest
returns are increased during rebalancing.
Which of the following is most likely?
a) Only Statement 1 is incorrect.
b) Only Statement 2 is incorrect.
c) Both statements are correct.