Equity Investments - Equity Investments Section 1

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22. Index P is a price return index. Index T is a total return index. Both have a starting value of 1000. Both have the same underlying securities and weighting system. Six months after inception the two index values will most likely be equal if:

  • Option : C
  • Explanation : Income generated over time by underlying securities in terms of dividend or interest creates a difference between a price return index and a total return index consisting of identical securities and weights. If the securities in the index do not generate income, both indices will be identical in value.
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23. An analyst gathers the following information for KSE3 index comprised of HBL, FFCL and EFOODS. This is a price-weighted index.

Security Beginning of periodprice (Rs.)End of period price(Rs.)Total Dividend (Rs.)
HBL  148153 8
FFCL   1041105
EFOODS   110904

  • Option :
  • Explanation : The price return of the price-weighted index is the percentage change in price of the index: (353-362) / 362 = - 2.49%.
    Security priceBeginning of periodEnd of period price
    HBL  148153
    FFCL104110
    EFOODS  11090
    TOTAL 362353
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24. A market-capitalization-weighted index consists of securities ABC, DEF and GHI:

Security Beginning of Period PriceEnd of Period PriceDividends per shareShare Outstanding
ABC 1,5001,700106,000
DEF  2,5001,500 158,500
GHI  50060010 10,000

  • Option : B
  • Explanation : The price return of the index is (28,950,000 - 35,250,000) / 35,250,000 = -17.87%.
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25. An analyst gathers the following data for a price-weighted index:

 Beginning of periodEnd of period
SecurityPrice$ SharesPrice$ Shares
A   1010015100
B4015038150
4015038 150

  • Option : A
  • Explanation : The sum of prices at the beginning of the period is 66; the sum at the end of the period is 73. Regardless of the divisor, the price return is 73 − 1 = 0.1061 or $10.61%.
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