Extra questions related to Indices

(c) 1 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 unsystematic risk
d) To determine factors influencing aggregate security price movements
e) To determine systematic risk
(c) 2 A properly selected sample for use in constructing a market indicator series
will consider the sample's source, size and
a) Value.
b) Average beta.
c) Breadth.
d) Variability.
e) Dividend record.
(a) 3 What effect does a stock substitution or stock split have on a price-weighted
series, such as DJIA?
a) Divisor will increase/decrease, index remains the same.
b) Index will increase/decrease, divisor remains the same.
c) Index and divisor will remain the same.
d) Index and divisor will both reflect the changes (immediately).
e) Not enough information provided.
(d) 4 An example of a value-weighted stock market indicator series is the
a) Dow Jones Industrial Average.
b) Nikkei-Dow Jones Average.
c) Value Line Index.
d) American Stock Exchange Index.
e) Lehman Brothers Index.
(d) 5 Which of the following indexes includes the most comprehensive list of
stocks?
a) New York Stock Exchange Composite Index
b) Standard and Poor's 500 Composite Index
c) American Stock Exchange Market Value Index
d) Nasdaq Composite
e) Dow Jones Industrial Average
(c) 6 The Value Line Composite Average is based on percent price changes
which has been computed using
a) An arithmetic mean.
b) A harmonic average.
c) A geometric mean.
d) An expected average.
e) A logarithmic average.
(e) 7 Which of the following are factors that make it difficult to create and
maintain a bond index?
a) The universe of bonds is broader than stocks.
b) The universe of bonds is constantly changing due to new issues, bond
maturities, calls, and bond sinking funds.
c) There can be difficulties in correctly pricing bond issues.
d) Choices a and c.
e) Choices a, b and c.
(a) 8 Low correlations between the S&P 500 stock index and the MSCI EAFE
suggest
a) That investors should diversify investment portfolios.
b) That investors should invest only in U.S. stocks.
c) That investors should invest only in Europe.
d) That investors should invest only is Asia.
e) Nothing.
(d) 9 Correlations between U.S. investment grade bonds are
a) Low because of the equity characteristics of high yield bonds.
b) Low because yields on investment grade bonds are determined by
systematic interest rate variables.
c) High because of the equity characteristics of high yield bonds.
d) High because yields on investment grade bonds are determined by
systematic interest rate variables.
e) None of the above.
(a) 10 Correlations between U.S. investment grade bonds and high yield bonds are
a) Low because of the equity characteristics of high yield bonds.
b) Low because yields on investment grade bonds are determined by
systematic interest rate variables.
c) High because of the equity characteristics of high yield bonds.
d) High because yields on investment grade bonds are determined by
systematic interest rate variables.
e) None of the above.
MULTIPLE CHOICE PROBLEMS
USE THE FOLLOWING INFORMATION FOR THE NEXT 12 PROBLEMS
31-Dec-03 31-Dec-03 31-Dec-04 31-Dec-04
Stock Price Shares Price Shares
W $ 75.00 10000 $ 50.00 30000
X $ 150.00 5000 $ 65.00 15000
Y $ 25.00 20000 $ 35.00 20000
Z $ 40.00 25000 $ 50.00 25000
Stocks W and X had 3 for 1 splits on December 31, 2003 at the end of trading.
(c) 1 Calculate the price weighted series for Dec 31, 2003, prior to the splits.
a) 103.57
b) 100.0
c) 72.5
d) 121.25
e) 119.25
(a) 2 Calculate the price weighted series for December 31, 2003 after the splits.
a) 72.5
b) 100.0
c) 119.25
d) 121.25
e) 103.57
(e) 3 Calculate the price weighted series for Dec 31, 2004.
a) 121.25
b) 119.25
c) 100.0
d) 72.5
e) 103.57
(a) 4 Calculate the percentage return in the price weighted series for the period
Dec 31, 2003 to Dec 31, 2004.
a) 42.86%
b) 20.00%
c) 21.76%
d) 33.33%
e) 40.00%
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(d) 5 Calculate the value weighted index for Dec 31, 2003, prior to the splits.
Assume a base index value of 100. The base year is Dec 31, 2003.
a) 147.5
b) 81.69
c) 72.5
d) 100.0
e) 121.25
(c) 6 Calculate the value weighted index for Dec 31, 2003, after the splits.
Assume a base index value of 100. The base year is Dec 31, 2003.
a) 72.5
b) 81.69
c) 100.0
d) 147.5
e) 121.25
(e) 7 Calculate the value weighted index for Dec 31, 2004. Assume a base index
value of 100. The base year is Dec 31, 2003.
a) 121.25
b) 100.0
c) 81.69
d) 72.5
e) 147.5
(b) 8 Calculate the percentage return in the value weighted index for the period
Dec 31, 2003 to Dec 31, 2004.
a) 12.68%
b) 47.50%
c) 21.76%
d) 33.33%
e) 40.00%
(a) 9 Calculate the unweighted index for Dec 31, 2003, prior to the splits.
Assume a base index value of 100. The base year is Dec 31, 2003.
a) 100.0
b) 200.0
c) 150.0
d) 120.0
e) 175.0
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(c) 10 Calculate the unweighted index for Dec 31, 2003, after the splits. Assume a
base index value of 100. The base year is Dec 31, 2003.
a) 110.0
b) 200.0
c) 100.0
d) 120.0
e) 150.0
(a) 11 Calculate the unweighted index (geometric mean) for Dec 31, 2004.
Assume a base index value of 100. The base year is Dec 31, 2003.
a) 146.05
b) 121.25
c) 151.25
d) 148.75
e) 100.25
(a) 12 Calculate the percentage return in the unweighted index (geometric mean)
for the period Dec 31, 2003 to Dec 31, 2004. Assume a base index value of
100. The base year is Dec 31, 2003.
a) 46.05%
b) 21.25%
c) 51.25%
d) 48.75%
e) 100.25%
USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS
You are given the following information regarding prices
for a sample of stocks:
Stock Number of Shares PriceT PriceT+1
A 1,000,000 50 60
B 10,000,000 30 35
C 25,000,000 20 25
(b) 13 Using a price-weighted series approach, what is the percentage change in
the series for the period from T to T + 1.
a) 1.20%
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b) 20.00%
c) 21.76%
d) 33.33%
e) 40.00%
(d) 14 Using a value-weighted series approach, what is the percentage change in
the series for the period from T to T + 1.
a) 1.22%
b) 20.00%
c) 20.55%
d) 21.76%
e) 33.33%
(c) 15 Construct an unweighted series (arithmetic mean) assuming $1,000 is
invested in each stock. What is the percentage change in wealth for this
portfolio?
a) 1.21%
b) 20.00%
c) 20.56%
d) 21.76%
e) 33.33%
USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS
Price Shares
COMPANY A B C A B C
Day 1 12 23 52 500 350 250
Day 2 10 22 55 500* 350 250
Day 3 8 26 51 1000 350 250**
Day 4 9 25 19 1000 350 750
*Split at Close of Day 2 **Split at Close of Day 3
(c) 16 Calculate a Dow Jones Industrial Index for Day 1.
a) 13.000
b) 19.000
c) 29.000
d) 87.000
e) 100.000
(c) 17 Calculate a Dow Jones Industrial Index for Day 4.
a) 11.2389
357
b) 21.3343
c) 31.2389
d) 41.6890
e) None of the above
(e) 18 Calculate a Standard & Poor's Index for Day 3 if the base period is Day 1
with an initial index value is 100.
a) 90.351
b) 91.035
c) 95.234
d) 101.628
e) 110.351
CHAPTER 7
ANSWERS TO MULTIPLE CHOICE PROBLEMS
1 PRICE WEIGHTED SERIES DEC 2003 = (75 + 150 + 25 + 40)/4 = 72.5
2 POST SPLIT SERIES = 72.5 = (25 + 50 + 25 + 40)/X
The new divisor, X = 1.931
3 PRICE WEIGHTED SERIES DEC 2004 = (50 + 65 + 35 + 50)/1.931 = 103.57
4 Return on series = (103.57 – 72.5)/72.5 = 42.86%
5 Value weighted series Dec 2003 =
100 100
750000 750000 500000 1000000
750000 750000 500000 1000000  





x
6 Value weighted post split = 100. Not affected by splits.
7 Value weighted series Dec 2004 =
18 Base = ($12 x 500) + ($23 x 350) + ($52 x 250) = $27,050
Day 3 ($8 x 1000) + ($26 x 350) + ($51 x 250) = $29,850
Index = ($29,850/$27,050) x 100 = 110.351