Equity Test 1.2

• A

• B

• C

Security market indexes can be used to calculate alphas, which are best described as:

• A. the systematic risk of a security, using the index as a proxy for the entire market.

• B. a measure of market sentiment.

• C. the difference between the return of the actively managed portfolio and the return of the passive portfolio.

Security market indexes are used as:

• A. measures of investment returns.

• B. proxies to measure unsystematic risk.

• C. proxies for specific asset classes in asset allocation models.

Lisa Smith owns a manufacturing company in the United States. Her company has sold goods to a customer in Brazil and will be paid in Brazilian real (BRL) in three months. Smith is concerned about the possibility of the BRL depreciating more than expected against the US dollar (USD). Therefore, she is planning to sell three-month futures contracts on the BRL. The seller of such contracts generally gains when the BRL depreciates against the USD. If Smith were to sell these future contracts, she would most appropriately be described as a(n):

• A. hedger.

• B. investor.

• C. information-motivated trader.

The MSCI All Country World Index is best described as a:

• A. broad market equity index.

• B. multi-market equity index.

• C. global sector equity index.

An Equity fund manager is considering a market index as the benchmark for his portfolio, and he has the following preferences:

-The index should have a contrarian effect

-Shares held by controlling shareholders should be included;

-Dividends should be included in the weighting of constituent securities;

-And the weights of constituent securities should not be arbitrarily determined by the index provider.

Which of the following weightings of indexes best meets the fund manager's preferences?

• Equal

• Float-adjusted market capitalization

• Fundamental

A hedge fund holds its excess cash in 90-day commercial paper and negotiable certificates of deposit. The cash management policy of the hedge fund is best described as using:

• A. capital market instruments.

• B. money market instruments.

• C. intermediate-term debt instruments.

A friend has asked you to explain the differences between open-end and closed-end funds. Which of the following will you most likely include in your explanation?

• A. Closed-end funds are unavailable to new investors.

• B. When investors sell the shares of an open-end fund, they can receive a discount or a premium to the fund’s net asset value.

• C. When selling shares, investors in an open-end fund sell the shares back to the fund whereas investors in a closed-end fund sell the shares to others in the secondary market.

A German company that exports machinery is expecting to receive $10 million in three months. The firm converts all its foreign currency receipts into euros. The chief financial officer of the company wishes to lock in a minimum fixed rate for converting the $10 million to euro but also wants to keep the flexibility to use the future spot rate if it is favorable. What hedging transaction is most likely to achieve this objective?

• A. Selling dollars forward.

• B. Buying put options on the dollar.

• C. Selling futures contracts on dollars.

A market has the following limit orders standing on its book for a particular stock. The bid and ask sizes are number of shares in hundreds. What is the market?

• A. 9.73 bid, offered at 10.14.

• B. 9.81 bid, offered at 10.10.

• C. 9.95 bid, offered at 10.02.