Equity 1.7 Test

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.

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

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.

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

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.

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

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

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

• A. securities’ weights to optimize investment performance.
• B. securities to maintain consistency with the target market.
• C. securities’ weights to maintain consistency with the index’s weighting method.

• A. $34.62.
• B. $37.94.
• C. $41.90.

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

• A. price and time.
• B. demand and time.
• C. demand and stage of the life cycle.