"Equity Investments":Security Market Indexes

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Questions 1:

The MSCI All Country World Index is best described as a:

A 、broad market equity index.

B、 multi-market equity index.

C 、global sector equity index.

Questions 2:

Which of the following statements regarding rebalancing and reconstitution of an index is most accurate?

A、 Market-capitalization-weighted indexes require frequent rebalancing.

B、 Reconstitution can dramatically affect prices of both current and prospective constituents.

C 、Reconstitution is part of index management that reduces the need for rebalancing.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. The MSCI All Country World Index is a multi-market equity index because it represents stocks of 23 developed and 22 emerging markets.

A is incorrect. The MSCI All Country World Index represents stocks of 23 developed and 22 emerging markets, not a selected market.

C is incorrect. The MSCI All Country World Index is composed of global stocks, but it doesn’t represent specific economic sectors.

【Answer to question 2】B

【analysis】

B is correct. Reconstitution is the process in which index providers review whether securities are retained, removed, or added. Prior to the index’s reconstitution date, portfolio managers buy stocks they think will be added to an index and sell stocks they think will be deleted from the index, thus dramatically altering the prices of the affected stocks.

A is incorrect because market-capitalization-weighted indexes largely rebalance themselves. An equal-weighted index is one that needs frequent rebalancing.

C is incorrect because reconstitution and rebalancing are both part of index management and create turnover of an index. Besides, reconstitution is a part of the rebalancing cycle.

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