WorksheetsEquity 1.7 Test
Total questions: 40
Worksheet time: 1hrs 20mins
Name
Class
Date
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 frequent rebalancing.
b)
B. A price-weighted index requires 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 profitability, 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 the company about competitors are generally not used when selecting the peer group.
b)
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)
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.
4.
If markets are only weak-form efficient, which of the following investment approaches is least likely to consistently earn abnormal profits?
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 fixed-income indexes?
a)
A. Many of the underlying securities in the index tend to be illiquid.
b)
B. The indexes are susceptible to turnover of the underlying securities.
c)
C. Compared with equity indexes, it is easier and less expensive to replicate fixed-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 investment performance.
b)
B. securities to maintain consistency with 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 of cash.
b)
B. want to reserve the right to close out 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 first 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 specific 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 pooled investment.
b)
B. secondary market transactions in a 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 different types of market indexes is least accurate?
a)
A. Commodity indexes are subject to different weighting methods for specific commodities.
b)
B. Equity indexes draw from a larger number of constituent securities than fixed-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 component in it.
b)
B. Business-cycle sensitivity is a discrete 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 flow (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 different valuation approaches is most accurate?
a)
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)
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.
c)
C. The justified forward price-to-earnings ratio (P/E) approach offers the advantage of incorporating fundamentals and presenting intrinsic value estimations.
28.
Q. Emerging markets have benefited from recent trends in international markets. Which of the following has not been a benefit of these trends?
a)
A. Emerging market companies do not have to worry about a lack of liquidity in their home equity markets.
b)
B. Emerging market companies have found it easier to raise capital in the markets of developed countries.
c)
C. Emerging market companies have benefited from the stability of foreign exchange markets.
29.
Q. With respect to efficient market theory, when a market allows short selling, the efficiency 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 find 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 influences
c)
C. Product life-cycle
34.
Which of the following statements is most accurate?
a)
A. Putable common shares provide benefits to both the issuing company and investors.
b)
B. Convertible preference shares are more volatile and riskier than the 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 defined asset class.
c)
C. determines the number of securities to be included in the index.
36.
Q. If markets are efficient, the difference 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 efficiency 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 process of the company.
b)
B. convert their shares into a specified number of common shares.
c)
C. receive an additional dividend if the company’s profits exceed a pre-determined level.
40.
a)
A. $20.35.
b)
B. $20.58.
c)
C. $20.50.
100 %
