FIN3105 SC 780: CHAPTER 5 – SECURITY MARKET INDEXES (QUESTIONS)

FIFTEEN (15) TRUE QUESTIONS

1. Technicians believe past price changes can be used to predict future price movements.
2. Indexes are a method to track the performance of a group of assets in a standardized
way.
3. The financial market includes the bond market and the foreign exchange market, where
people trade currencies.
4. Securities are a financial instrument.
5. Many investors use the computed return-risk results as a benchmark to judge the
performance of individual portfolios.
6. Indexes can be used to establish an index portfolio.
7. Some people prefer using a geometric mean rather than an arithmetic mean.
8. One can use security-market indexes to gauge mean annual security returns and risk.
9. Brinson Partner Global Security Market Index (GSMI) contains U.S. stocks and bonds,
as well as non-U.S. equities and non-dollar bonds.
10. Composite stock-bond indexes consider the advantages of diversifying the allocation of
assets across securities.
11. The universe of bonds is much broader than that of stocks.
12. Knowledge regarding indexes is important because of the growth of fixed-income money
managers.
13. Investors know little about the rising number bond market indexes currently available
because these indexes are relatively new and not widely published.
14. Some observers struggle that the weighting scheme results in the overweighting of
overvalued stocks over time and underweighting undervalued stocks.
15. One way to visualize an unweighted index is to assume that equal dollar amounts are
invested in each stock in the portfolio.
FIFTEEN (15) FALSE QUESTIONS
1. The arithmetic mean of the components is preferred by many rather than the geometric
mean.
2. The Standard & Poor’s 500 is a price-weighted average of 500 large, well-known
industrial stocks.
3. A price-weighted index is generated by deriving the initial total market value of all stocks
used in the index.
4. The universe of bonds is stable and does not change constantly.
5. The Merrill Lynch-Wilshire Capital Markets Index (ML-WCMI) is a value-weighted index
that measures the total performance of the combined U.S. taxable fixed-income and
equity markets.
6. The Brinson Partner Global Security Market Index (GSMI) is the most diversified
benchmark available with a non-weighting scheme.
7. The overriding determinate of rates of return for investment-grade bonds over time are
bond prices.
8. One of the rationales for using market-value weighting is that the market value of a firm
is not an obvious measure of its economic importance.
9. The Nikkei Stock Average Index is a geometric mean of prices for 225 stocks.
10. The value-weighted index is the oldest and most popular stock-market index.
11. A price-weighted index is a geometric mean of current stock prices, which means that
index movements are influenced by the differential prices of the components.
12. A fundamentally weighted index is based on some non-operating variables like sales,
earnings, or return on equity.
13. The computational procedure can be generated by completely random selection or by a
nonrandom selection technique designed to incorporate the important characteristics of
the desired population.
14. A secondary application of indexes is to compute total returns and risk measures for an
aggregate market.
15. There is no adjustment for stock splits and other capital changes with a value-weighted
index.