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CFA Level 1 Question of the Week - Equity Investements

Which of the following is most likely a potential challenge faced by investors during the construction of fixed income securities indices?

CFA Level 1 Question of the Week - Equity Investements 12 votes

A. A large universe of securities
50% 6 votes
B. Investment barriers imposed by authorities/government
16% 2 votes
C. A lack of diverse investment vehicles
33% 4 votes

Comments

  • The correct answer is A.

    The fixed-income universe is quite wide: There are securities issued by public-owned corporations, governments, government agencies, and even private firms. Each of these entities issues a variety of fixed-income securities with different characteristics. Therefore, the number of fixed-income securities is many times larger than the number of equity securities.

    To accurately represent a specific fixed-income segment, an index usually includes thousands of different securities. What's more, all these fixed-income securities mature at some point, and issuers replace them with new ones. Thus, the turnover in fixed-income indices is quite high, and developers have to constantly update the index structure.
    lugnuts
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