Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

How is the share price of an investment trust determined?

1. Based on historical performance alone.

2. A combination of the value of the underlying assets and supply and demand.

3. Fixed by the board of directors.

4. Determined solely by market speculation.

The correct answer is: A combination of the value of the underlying assets and supply and demand.

The share price of an investment trust is primarily determined by a combination of the value of the underlying assets and supply and demand. This reflects the market's perception of the value of the trust's holdings, which include various assets such as stocks, bonds, or real estate. As the value of these underlying assets fluctuates, so too does the share price of the investment trust. Additionally, supply and demand dynamics play a crucial role. If more investors want to buy shares than there are available shares to purchase, the price will tend to rise, whereas if there are more sellers than buyers, the price will generally fall. This market-driven mechanism ensures that the share price reflects both the intrinsic value of the investments held by the trust and current market sentiment. In contrast, relying solely on historical performance would not account for current market conditions or changes in the value of underlying assets. Similarly, stating that the board of directors fixes the price overlooks the influential role of the free market, and saying that market speculation alone determines the price ignores the fundamental value invested in the trust’s assets. Hence, the combination of asset values and supply and demand provides the most accurate reflection of an investment trust's share price.