1 . James Investments is calculating an equally weighted index on a four stock portfolio.
Stock Number of Shares Initial Cost Current Cost W X Y Z 100 1,000 500 1500 5.00 10.00 7.50 5.00 5.00 12.50 10.00 8.00
If the initial index value is 100, the current index is closest to: A) B) C)
The correct answer was: A
First calculate the return relatives and then find the mean of the relatives. The number of shares is irrelevant in this question. 5/5 = 1 12.5/10 = 1.25 10/7.50 = 1.33 8/5 = 1.60
(1 + 1.25 + 1.33 + 1.60) / 4 = 1.295 100 × 1.295 = 129.5
2 . An investor buys 400 shares of a stock for $25 a share. The initial margin requirement is 50%, and the maintenance margin requirement is 25%. At what price would an investor receive a margin call? A) B) C)
The correct answer was C
$21.88. $30.00. $16.67. 129.5. 137.9. 142.6.
Margin call trigger price = [25(1 - 0.5)] / (1 - 0.25) = 16.67.
3 . An index provider maintains a price index and a total return index for the same 40 stocks. Assuming both indexes begin the year with the same value, the total return index at the end of the year will be: A) B)
greater than the price index.
equal to the price index if the constituent stocks do not pay dividends.
C) less than the price index if the price index increases and greater than the price index if the price index decreases.
The correct answer was B
A price index only includes the prices of the constituent securities in the calculation of the index value. A total return index includes the prices and the dividends paid in the calculation of the index value. If all of the constituents are non-dividend paying stocks, then the total return index will be the same as the price index at the end of the year. Otherwise the total return index will be greater than the price index.
4 . Which of the following statements concerning market efficiency is least accurate?
A) If weak-form market efficiency holds, technical analysis cannot be used to earn abnormal returns over the long-run. B)
Market efficiency assumes that individual market participants correctly estimate asset prices.
C) Tests of the semi-strong form of the EMH require that security returns be risk-adjusted using a market model.
The correct answer was B
Market efficiency does not assume that individual market participants correctly estimate asset prices, but does assume that their estimates are unbiased. That is, some agents will over-estimate and some will under-estimate, but they will be correct, on average.
5 . Which of the following statements about market efficiency is least accurate?
A) The weak-form EMH suggests that fundamental analysis will not provide excess returns while the semi-strong form suggests that technical analysis cannot achieve excess returns.
B) The strong-form EMH assumes cost free availability of all information, both public and private. C)
The semi-strong form EMH addresses market and non-market public information.
The correct answer was: A
The weak-form EMH suggests that technical analysis will not provide excess returns while the semi-strong form suggests that fundamental analysis cannot achieve excess returns. The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns.
The other choices are correct. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets – information is free and available to all.
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