Equity Investments - Equity Investments Section 1
- Option : C
- Explanation : The total return of an index is the price appreciation, or change in the value of the price return index, plus income (dividends and/or interest) over the period, expressed as a percentage of the beginning value of the price return index. TRI = (V PRI1 - V PRI0 + Inc1) / V Where TRI = the total return of the index portfolio (as a decimal number) VPRI1= the value of the price return index at the end of the period VPRI0 = the value of the price return index at the beginning of the period Inc1 = the total income (dividends and/or interest) from all securities in the index held over the period -3.5% = (1000 - VPRI0 + 45.5 12) / VPRI0; VPRI0 = (1000 + 45.5 + 12) / (1 - 3.5%) = 1,096.
- Option : C
- Explanation : In the price weighting method, the divisor must be adjusted so the index value immediately after the split is the same as the value immediately prior to split.
43. Rebalancing is most likely to involve:
- Option : C
- Explanation : Rebalancing involves adjusting securities‟ weights to maintain consistency with the index‟s weighting method.
44. What does reconstitution of a security market index help reduce?
- Option : C
- Explanation : Reconstitution is the process of changing the constituent securities in an index. Constituent securities that no longer meet the criteria are replaced with securities that do meet the criteria. Thus, reconstitution reduces the likelihood that the index includes securities that are not representative of the target market.
45. Which of the following is least likely true about security market indices?
- Option : B
- Explanation : Security market indices serve as model portfolios for investment products. We cannot invest directly in an index.
