Question 1

The most common way to test a portfolio manager's performance is to compare the portfolio return to a benchmark.

Accepted Answer

This is true. Comparing a portfolio manager's performance to a benchmark is a commonly used method to evaluate performance in the investment industry.

Question 2

Which is an example of a Style Index?
A) small-cap growth
B) mid-cap value
C) small-cap value
D) mid-cap growth
E) All of these are correct.

Accepted Answer

The answer of Which is an example of a Style...

Question 3

There are no composite series currently available that will measure the performance of all securities (i.e. stocks and bonds) in a given country.

Accepted Answer

There are composite series available, such as the S&P 500 or the Dow Jones, that measure the performance of stocks in the United States. There are also composite series that track bonds, such as the Bloomberg Barclays US Aggregate Bond Index. However, there are no composite series that combine both stocks and bonds in a single measurement.

Question 4

Which of the following is NOT a global equity indicator series?
A) Morgan Stanley Capital International Indexes
B) Dow Jones World Stock Index
C) FT/S & P-Actuaries World Indexes
D) Merrill Lynch-Wilshire World Indexes
E) Brinson Partner Global Security Market Index (GSMI)

Accepted Answer

Merrill Lynch-Wilshire World Indexes is not a recognized global equity indicator series. The others listed are well-known indexes used to track the performance of global equity markets.

Question 5

Which of the following is NOT a value-weighted series?
A) NASDAQ Industrial Index
B) Dow Jones Industrial Average
C) Wilshire 5000 Equity Index
D) American Stock Exchange Series
E) NASDAQ Composite Index

Accepted Answer

The Dow Jones Industrial Average is not a value-weighted series; it is a price-weighted index, meaning that companies with higher stock prices have more influence on the index's performance, regardless of the actual size or value of the company.

Question 6

A properly selected sample for use in constructing a market indicator series will consider the sample's source, size, and
A) breadth.
B) average beta.
C) value.
D) variability.
E) dividend record.

Accepted Answer

The breadth of a sample refers to the range of different types of securities or market participants that are included in the sample. A properly selected sample for use in constructing a market indicator series will consider the sample's source, size, and breadth in order to ensure that the sample is representative of the entire market.

Question 7

For an indexed portfolio, the fund manager will typically attempt to replicate the composition of the particular index exactly.

Accepted Answer

The aim of an indexed portfolio is to mimic the performance of a specific benchmark index. To achieve this, the fund manager will usually try to replicate the index composition as closely as possible. This involves buying the same securities in the same proportions as they are weighted in the index, so as to provide investors with similar returns to the benchmark.

Question 8

What effect does a stock substitution or stock split have on a price-weighted series?
A) Index remains the same; divisor will increase/decrease.
B) Divisor remains the same; index will increase/decrease.
C) Index and divisor will both remain the same.
D) Index and divisor will both reflect the changes (immediately).
E) None of these are correct.

Accepted Answer

A stock substitution or stock split will not change the overall value of the index, but it will affect the divisor. If a stock is substituted or split, it will affect the weight of that stock in the index, which will then affect the divisor. The divisor will need to be adjusted accordingly in order for the index to remain consistent. As a result, the index remains the same, but the divisor will either increase or decrease.

Question 9

The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.

Accepted Answer

The NYSE (New York Stock Exchange) does not inherently have higher rates of return and risk measures compared to AMEX (American Stock Exchange, now known as NYSE American) and OTC (Over-The-Counter) markets. The rates of return and risk measures depend on the specific securities traded on these exchanges, their market capitalization, industry sectors, and market conditions, rather than the exchanges themselves.

Question 10

Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.

Accepted Answer

ETFs are designed to track the performance of a specific basket of underlying securities such as stocks, bonds, or commodities. When an investor buys an ETF, they effectively own a share in a diversified portfolio of assets, and receive a portion of the profits and cash flows generated by the underlying securities. This makes them different from traditional mutual funds, which are priced once a day after the markets have closed, while ETF prices are constantly changing throughout the trading day.

Question 11

A benchmark measures the performance by portfolio managers.

Accepted Answer

A benchmark is a standard against which the performance of a portfolio manager is measured. It provides a basis for comparison and evaluation of investment performance.

Question 12

In a price weighted average stock market indicator series, the following type of stock has the greatest influence:
A) the stock with the highest price.
B) the stock with the lowest price.
C) the stock with the highest market capitalization.
D) the stock with the lowest market capitalization.
E) the stock with the highest P/E ratio.

Accepted Answer

In a price-weighted average, each stock's influence on the index is directly proportional to its price. Therefore, the stock with the highest price will have the greatest influence on the indicator series.

Question 13

The Value Line Composite Average is calculated using the ____ of percentage price changes.
A) arithmetic average
B) harmonic average
C) expected value
D) geometric average
E) logarithmic average

Accepted Answer

The Value Line Composite Average is calculated using the geometric average of percentage price changes. This is because the geometric average is appropriate for measuring investment performance over time, as it accounts for the compounding effect of returns.

Question 14

Of the following indices, which includes the most comprehensive list of stocks?
A) New York Exchange Index
B) Standard and Poor's Index
C) American Stock Exchange Index
D) NASDAQ Series Index
E) Wilshire Equity Index

Accepted Answer

The Wilshire Equity Index includes all publicly traded stocks in the U.S., making it the most comprehensive index out of the options listed. The other indices have limitations in terms of the number of stocks they include or the specific exchanges they cover.

Question 15

In a value weighted index,
A) exchange rate fluctuations have a large impact.
B) exchange rate fluctuations have a small impact.
C) large companies have a disproportionate influence on the index.
D) small companies have an exaggerated effect on the index.
E) None of these are correct.

Accepted Answer

A value weighted index gives more importance to companies with higher market capitalization. Therefore, larger companies have a disproportionate influence on the index, while smaller companies have a relatively smaller impact. Exchange rate fluctuations typically affect all companies in the index, regardless of their size, and do not have a large or small impact based solely on the weighting methodology of the index.

Question 16

The correlations among the U.S. investment-grade-bond series were very high because all rates of return for investment-grade bonds over time are impacted by common macroeconomic variables.

Accepted Answer

The statement is true. Investment-grade bond returns are influenced by macroeconomic variables such as inflation, interest rates, and economic growth, which affect all bonds in the same way, resulting in high correlations among the series.

Question 17

There is a high correlation between the Wilshire 5000 index and the alternative NYSE series (S&P 500 and the NYSE), which represents the substantial influence of large NYSE stocks on the Wilshire 5000 index.

Accepted Answer

The statement is true as the Wilshire 5000 index includes all publicly traded stocks on the major US exchanges, including the NYSE and the S&P 500, and thus reflects the performance of large NYSE stocks. Therefore, there is a high correlation between the Wilshire 5000 index and the alternative NYSE series.

Question 18

The low correlations between the U.S. and Japan confirm the benefit of global diversification.

Accepted Answer

Global diversification can help reduce risk by investing in assets that are not perfectly correlated, which means that they don't move in the same direction at the same time. The low correlations between the U.S. and Japan suggest that investing in both markets can help reduce overall portfolio risk.

Question 19

Which of the following is NOT a use of security market indicator series?
A) to use as a benchmark of individual portfolio performance
B) to develop an index portfolio
C) to determine factors influencing aggregate security price movements
D) to use in the measurement of systematic risk
E) to use in the measurement of diversifiable risk

Accepted Answer

Security market indicator series are not used in the measurement of diversifiable risk. Diversifiable risk can be minimized through diversification of investments in different assets or securities. Security market indicators are used to determine factors influencing aggregate security price movements, to measure systematic risk, to use as a benchmark of individual portfolio performance, and to develop an index portfolio.

Question 20

An example of a value weighted stock market indicator series is the
A) Dow Jones Industrial Average.
B) Nikkei Dow Jones Average.
C) S & P 500 Index.
D) Value Line Index.
E) Shearson Lehman Hutton Index.

Accepted Answer

The S&P 500 Index is a value-weighted index, meaning it is calculated based on the market capitalization of its constituent companies.

Quiz 4: Security Market Indexes and Index Funds

The most common way to test a portfolio manager's performance is to compare the portfolio return to a benchmark.

Which is an example of a Style Index?

There are no composite series currently available that will measure the performance of all securities (i.e. stocks and bonds) in a given country.

Which of the following is NOT a global equity indicator series?

Which of the following is NOT a value-weighted series?

A properly selected sample for use in constructing a market indicator series will consider the sample's source, size, and

For an indexed portfolio, the fund manager will typically attempt to replicate the composition of the particular index exactly.

What effect does a stock substitution or stock split have on a price-weighted series?

The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.

Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.

A benchmark measures the performance by portfolio managers.

In a price weighted average stock market indicator series, the following type of stock has the greatest influence:

The Value Line Composite Average is calculated using the ____ of percentage price changes.

Of the following indices, which includes the most comprehensive list of stocks?

In a value weighted index,

The correlations among the U.S. investment-grade-bond series were very high because all rates of return for investment-grade bonds over time are impacted by common macroeconomic variables.

There is a high correlation between the Wilshire 5000 index and the alternative NYSE series (S&P 500 and the NYSE), which represents the substantial influence of large NYSE stocks on the Wilshire 5000 index.

The low correlations between the U.S. and Japan confirm the benefit of global diversification.

Which of the following is NOT a use of security market indicator series?

An example of a value weighted stock market indicator series is the