Chapter 2 practice questions

USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS

Number of shares Closing Prices (per share)

Companies outstanding Day T Day T + 1

1 2,000 $30.00 $25.00

2 7,000 55.00 60.00

3 5,000 20.00 25.00

4 4,000 40.00 45.00

(a) 23 Assume that a stock price-weighted indicator consisted of the four issues with their
prices. What are the values of the stock indicator for Day T and T + 1 and what is the
percentage change?

a) 36.25, 38.75, 6.9%

b) 38.75, 36.25, -6.9%
c) 100, 106.9, 6.9%
d) 107.48, 106.33, 1.15%
e) None of the above

Closing Prices (per share)

Companies Day T Day T + 1

1 30.00 25.00

2 55.00 60.00

3 20.00 25.00

4 40.00 45.00

145/4 155/4

36.25 38.75

Therefore the index closed up 38.75/36.25 – 1 = 6.9%

(c) 24 For a value-weighted series, assume that Day T is the base period and the base value is
100. What is the new index value for Day T + 1 and what is the percentage change in the
index from Day T?
a) 106.33, 6.33%
b) 107.48, 7.48%
c) 109.93, 9.93%
d) 108.7, 8.7%
e) None of the above

Number of shares Price

Companies outstanding Day T Market value

1 2,000 30.00 60,000

2 7,000 55.00 385,000

3 5,000 20.00 100,000

4 4,000 40.00 160,000

705,000

Base value equal to an index of 100

Number of shares Price

Companies outstanding Day T + 1 Market value

1 2,000 25.00 70,000

2 7,000 60.00 420,000

3 5,000 25.00 125,000

4 4,000 45.00 180,000

775,000

775,000
Index = x 100 = 109.93
705,000

Therefore the index closed up 9.93%

 USE THE FOLLOWING INFORMATION FOR THE NEXT FIVE PROBLEMS

Stock Price # Shares

X Y Z X Y Z

Jan. 13, 2005 20 40 30 1000 2000 1000*

Jan. 14, 2005 25 42 18 1000 2000 2000

Jan. 15, 2005 27 45 8 1000** 2000 2000

Jan. 16, 2005 20 40 10 3000 2000 2000

*2:1 Split on Stock Z after Close on Jan. 13, 2005

**3:1 Split on Stock X after Close on Jan. 15, 2005

The base date for index calculations is January 13, 2005

(b) 25 Calculate a price weighted average for January 13th.

a) 32
b) 30
c) 36.13
d) 34
e) None of the above

January 13 index = (20 + 40 + 30) ÷ 3 = 30

(b) 26 What is the divisor at the beginning of January 14th?

a) 3.0
b) 2.5
c) 2.2734
d) 1.9375
e) None of the above
 January 14 adjusted divisor = (20 + 40 + 15) ÷ X = 30

X = 2.5

(d) 27 Calculate a price weighted average for January 16th.

a) 30
b) 32
c) 34
d) 36.13
e) None of the above

Step 1: January 15 index = (27 + 45 + 8) ÷ 2.5 = 32

Step 2: January 16 divisor = (9 + 45 + 8) ÷ X = 32

X = 1.9375

Step 3: January 16 index = (20 + 40 + 10) ÷ 1.9375 = 36.13

(b) 28 Calculate a value weighted index for Jan. 13th if the initial index value is 100.

a) 111.54
b) 100
c) 102.31
d) 123.07
e) None of the above

January 13 index = 100 by definition

(a) 29 Calculate a value weighted index for January 15th if the initial index value is 100.

a) 102.31
b) 100
c) 123.07
d) 111.54
 e) None of the above

Base Value ( January 13) = (20)(1000) + (40)(2000) + (30)(1000) = $130,000

January 15 Value = (27)(1000) + (45)(2000) + (8)(2000) = 133,000

Index = (133,000 ÷ 130,000) x 100= 102.3077

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.

(e) 4 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) 5 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%
354
(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
355
(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%
356
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