NAME :

CLASS :
Equity 1.7 Test
DATE :

40 Questions

1. Which of the following statements is most accurate with respect to rebalancing and
reconstitution of security market indexes?

a) A. Equal-weighted indexes require b) B. A price-weighted index requires

frequent rebalancing. rebalancing more than a market-
capitalization-weighted index.

c) C. Turnover within an index results from

a reconstitution but not from
rebalancing.

2. An industry characterized by rapidly increasing demand, improving proKtability, and falling

prices is most likely in which of the following stages of life cycle?

a) A. Growth b) B. Maturity
c) C. Embryonic
3. Q. With regard to forming a company’s peer group, which of the following statements is not
correct?

a) A. Comments from the management of b) B. The higher the proportion of revenue

the company about competitors are and operating proKt of the peer company
generally not used when selecting the derived from business activities similar to
peer group. those of the subject company, the more
meaningful the comparison.

c) C. Comparing the company’s

performance measures with those for a
potential peer-group company is of
limited value when the companies are
exposed to diRerent stages of the
business cycle.

4. If markets are only weak-form eTcient, which of the following investment approaches is
least likely to consistently earn abnormal proKts?

a) A. Exploiting of non-public information b) B. Buying and selling based on

fundamental analysis

c) C. Trading based on patterns of prices

and volume

5. Which of the following statements is least accurate with respect to Kxed-income indexes?

a) A. Many of the underlying securities in b) B. The indexes are susceptible to

the index tend to be illiquid. turnover of the underlying securities.

c) C. Compared with equity indexes, it is

easier and less expensive to replicate
Kxed-income indexes.
6. Q. Which factor is most likely associated with stable market share?

a) A. Low switching costs b) B. Low barriers to entry

c) C. Slow pace of product innovation

7. Assuming a 4% required rate of return, what is the intrinsic value per share of an
outstanding issue of 5% perpetual preferred stock with a par value of £100 and no embedded
options?

a) A. £80 b) B. £100
c) C. £125

8. Q. Rebalancing an index is the process of periodically adjusting the constituent:

a) A. securities’ weights to optimize b) B. securities to maintain consistency with

investment performance. the target market.

c) C. securities’ weights to maintain

consistency with the index’s weighting
method.
9.

a) A. $34.62. b) B. $37.94.

c) C. $41.90.

10. Q. When graphically depicting the life-cycle model for an industry as a curve, the variables
on the axes are:

a) A. price and time. b) B. demand and time.

c) C. demand and stage of the life cycle.

11.

a) A. 3.5. b) B. 5.8.

c) C. 2.5.

12. Forward contracts are most likely to be attractive hedging vehicles to investors who:

a) A. do not want to make an upfront outlay b) B. want to reserve the right to close out
of cash. their position early.

c) C. are not in a position to investigate the

creditworthiness of their counterparties.
13. Assume the current dividend of a security is $9.50. The dividend is expected to grow by 12%
each year for two years and then 3% afterwards. The required rate of return is 15%. The
security’s value is closest to:

a) A. $95.58. b) B. $120.51.
c) C. $94.99.

14. Q. When creating a security market index, an index provider must Krst determine the:

a) A. target market. b) B. appropriate weighting method.

c) C. number of constituent securities.

15. Q. Commodity index values are based on:

a) A. futures contract prices. b) B. the market price of the speciKc

commodity.

c) C. the average market price of a basket of

similar commodities.

16. Q. The Standard & Poor’s Depositary Receipts (SPDRs) is an investment that tracks the S&P
500 stock market index. Purchases and sales of SPDRs during an average trading day are best
described as:

a) A. primary market transactions in a b) B. secondary market transactions in a

pooled investment. pooled investment.

c) C. secondary market transactions in an

actively managed investment.
17. Q. Which of the following is not a real estate index category?

a) A. Appraisal index. b) B. Initial sales index.

c) C. Repeat sales index.

18. Q. A population that is rapidly aging would most likely cause the growth rate of the industry
producing eye glasses and contact lenses to:

a) A. decrease. b) B. increase.

c) C. not change.

19.

a) A. 1.7%. b) B. 5.0%.

c) C. 11.4%.
20. Which of the following statements concerning diRerent types of market indexes is least
accurate?

a) A. Commodity indexes are subject to b) B. Equity indexes draw from a larger

diRerent weighting methods for speciKc number of constituent securities than
commodities. Kxed-income indexes.

c) C. Hedge fund indexes are subject to

survivorship bias from voluntary
reporting.

21. Q. Which of the following index weighting methods is most likely subject to a value tilt?

a) A. Equal weighting. b) B. Fundamental weighting.

c) C. Market-capitalization weighting.

22. Q. Which of the following is not a limitation of the cyclical/non-cyclical descriptive approach
to classifying companies?

a) A. A cyclical company may have a growth b) B. Business-cycle sensitivity is a discrete

component in it. phenomenon rather than a continuous
spectrum.

c) C. A global company can experience

economic expansion in one part of the
world while experiencing recession in
another part.
23.

a) A. $28.36. b) B. $29.65.

c) C. $29.08.
24.

a) A. take the market. b) B. make the market.

c) C. make a new market.

25. In futures markets, contract performance is most likely guaranteed by:

a) A. the futures exchanges. b) B. regulatory agencies.

c) C. clearing houses.

26. An analyst has prepared a table of the average trailing twelve-month price-to-earning (P/E),
price-to-cash gow (P/CF), and price-to-sales (P/S) for the Tanaka Corporation for the years 2014
to 2017.

a) A. overvalued. b) B. undervalued.

c) C. fairly valued.
27. Which of the following statements concerning diRerent valuation approaches is most
accurate?

a) A. One advantage of the three-stage b) B. It is advantageous to use asset-based

dividend discount model (DDM) model is valuation approaches rather than
that it is equally appropriate to young forward-looking cash gow models in the
companies entering the growth phase case of companies that have signiKcant
and those entering the maturity phase. intangibles.

c) C. The justiKed forward price-to-earnings

ratio (P/E) approach oRers the advantage
of incorporating fundamentals and
presenting intrinsic value estimations.

28. Q. Emerging markets have beneKted from recent trends in international markets. Which of
the following has not been a beneKt of these trends?

a) A. Emerging market companies do not b) B. Emerging market companies have

have to worry about a lack of liquidity in found it easier to raise capital in the
their home equity markets. markets of developed countries.

c) C. Emerging market companies have

beneKted from the stability of foreign
exchange markets.

29. Q. With respect to eTcient market theory, when a market allows short selling, the eTciency
of the market is most likely to:

a) A. increase. b) B. decrease.

c) C. remain the same.

30. A company’s $100 par value perpetual preferred stock has a dividend rate of 7% and a
required rate of return of 11%. The company’s earnings are expected to grow at a constant rate
of 3% per year. If the market price per share for the preferred stock is $75, the preferred stock is
most appropriately described as being:

a) A. overvalued by $11.36. b) B. undervalued by $15.13.

c) C. undervalued by $36.36.

31. A portfolio of securities representing a given security market, market segment, or asset
class is best described as a:

a) A. benchmark. b) B. security market index.

c) C. total return index.

32. Q. Tony Harris is planning to start trading in commodities. He has heard about the use of
futures contracts on commodities and is learning more about them. Which of the following is
Harris least likely to Knd associated with a futures contract?

a) A. Existence of counterparty risk. b) B. Standardized contractual terms.

c) C. Payment of an initial margin to enter

into a contract.

33. Which of the following is most likely an element of a strategic analysis of an industry?

a) A. Corporate governance b) B. Macroeconomic inguences

c) C. Product life-cycle
34. Which of the following statements is most accurate?

a) A. Putable common shares provide b) B. Convertible preference shares are

beneKts to both the issuing company and more volatile and riskier than the
investors. underlying common shares.

c) C. Investors owning a small number of

common shares would prefer statutory
voting to cumulative voting.

35. Q. When creating a security market index, the target market:

a) A. determines the investment universe. b) B. is usually a broadly deKned asset class.

c) C. determines the number of securities

to be included in the index.

36. Q. If markets are eTcient, the diRerence between the intrinsic value and market value of a
company’s security is:

a) A. negative. b) B. zero.

c) C. positive.

37. The type of eTciency that exists in an economy that distributes capital in the most
productive way is best described as:

a) A. allocational. b) B. informational.
c) C. operational.
38. Q. Hideki Corporation has just paid a dividend of ¥450 per share. Annual dividends are
expected to grow at the rate of 4 percent per year over the next four years. At the end of four
years, shares of Hideki Corporation are expected to sell for ¥9000. If the required rate of return
is 12 percent, the intrinsic value of a share of Hideki Corporation is closest to:

a) A. ¥5,850. b) B. ¥7,220.

c) C. ¥7,670.

39. Q. Participating preference shares entitle shareholders to:

a) A. participate in the decision-making b) B. convert their shares into a speciKed

process of the company. number of common shares.

c) C. receive an additional dividend if the

company’s proKts exceed a pre-
determined level.
40.

a) A. $20.35. b) B. $20.58.

c) C. $20.50.
Answer Key
1. a
2. a
3. a
4. c
5. c
6. c
7. c
8. c
9. c
10. b
11. a
12. a
13. a
14. a
15. a
16. b
17. b
18. b
19. b
20. b
21. b
22. b
23. b
24. a
25. c
26. a
27. c
28. c
29. a
30. a
31. b
32. a
33. b
34. a
35. a
36. b
37. a
38. b
39. c
40. a