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

C. securities’ weights to maintain consistency with the index’s weighting method.

A. securities’ weights to optimize investment performance.

B. securities to maintain consistency with the target market.

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

C. demand and stage of the life cycle.

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

A. do not want to make an upfront outlay of cash.

B. want to reserve the right to close out their position early.

C. are not in a position to investigate the creditworthiness of their counterparties.

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

B. appropriate weighting method.

C. number of constituent securities.

Q. Commodity index values are based on:

B. the market price of the specific commodity.

C. the average market price of a basket of similar commodities.

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:

B. secondary market transactions in a pooled investment.

A. primary market transactions in a pooled investment.

C. secondary market transactions in an actively managed investment.

Which of the following statements concerning different types of market indexes is least accurate?

B. Equity indexes draw from a larger number of constituent securities than fixed-income indexes.

A. Commodity indexes are subject to different weighting methods for specific commodities.

C. Hedge fund indexes are subject to survivorship bias from voluntary reporting.

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

C. Market-capitalization weighting.

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

B. Business-cycle sensitivity is a discrete phenomenon rather than a continuous spectrum.

A. A cyclical company may have a growth component in it.

C. A global company can experience economic expansion in one part of the world while experiencing recession in another part.

Which of the following statements concerning different valuation approaches is most accurate?

C. The justified forward price-to-earnings ratio (P/E) approach offers the advantage of incorporating fundamentals and presenting intrinsic value estimations.

A. One advantage of the three-stage dividend discount model (DDM) model is that it is equally appropriate to young companies entering the growth phase and those entering the maturity phase.

B. It is advantageous to use asset-based valuation approaches rather than forward-looking cash flow models in the case of companies that have significant intangibles.

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

C. Emerging market companies have benefited from the stability of foreign exchange markets.

A. Emerging market companies do not have to worry about a lack of liquidity in their home equity markets.

B. Emerging market companies have found it easier to raise capital in the markets of developed countries.

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 find associated with a futures contract?

A. Existence of counterparty risk.

B. Standardized contractual terms.

C. Payment of an initial margin to enter into a contract.

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

A. determines the investment universe.

B. is usually a broadly defined asset class.

C. determines the number of securities to be included in the index.

Q. Participating preference shares entitle shareholders to:

C. receive an additional dividend if the company’s profits exceed a pre-determined level.

A. participate in the decision-making process of the company.

B. convert their shares into a specified number of common shares.

Equity 1.7 Test

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MULTIPLE CHOICE QUESTION

2 mins • 1 pt

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

A. Equal-weighted indexes require frequent rebalancing.

B. A price-weighted index requires rebalancing more than a market-capitalization-weighted index.

C. Turnover within an index results from a reconstitution but not from rebalancing.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

An industry characterized by rapidly increasing demand, improving profitability, and falling prices is most likely in which of the following stages of life cycle?

A. Growth

B. Maturity

C. Embryonic

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Q. With regard to forming a company’s peer group, which of the following statements is not correct?

A. Comments from the management of the company about competitors are generally not used when selecting the peer group.

B. The higher the proportion of revenue and operating profit of the peer company derived from business activities similar to those of the subject company, the more meaningful the comparison.

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 different stages of the business cycle.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

If markets are only weak-form efficient, which of the following investment approaches is least likely to consistently earn abnormal profits?

A. Exploiting of non-public information

B. Buying and selling based on fundamental analysis

C. Trading based on patterns of prices and volume

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Which of the following statements is least accurate with respect to fixed-income indexes?

A. Many of the underlying securities in the index tend to be illiquid.

B. The indexes are susceptible to turnover of the underlying securities.

C. Compared with equity indexes, it is easier and less expensive to replicate fixed-income indexes.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Q. Which factor is most likely associated with stable market share?

A. Low switching costs

B. Low barriers to entry

C. Slow pace of product innovation

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

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. £80

B. £100

C. £125

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