Q&A Hero

Q: A financial plan should include decisions on:a. Children.b. Spouse.c. Risk tolerance, purchase of a house, tax planning, life, health, disability, and protection of business and property insurance, and emergency reserve funds.d. Career.

Q: Which of the following indices would be most appropriate as a benchmark portfolio for a large-cap mutual fund?Wilshire 5000.S&P 500.Dow Jones Industrial Average.Russell 2000.

Q: Futures contracts are regulated by the:a. Securities Exchange Commission.b. National Association of Security Dealers.c. National Association of Commodity Dealers.d. Commodity Futures Trading Commission.

Q: A forward contract differs from a futures contract in that:a. a forward contract is for a shorter period of time.b. a forward contract does not specify the selling price.c. a forward contract does specify the selling price.d. a forward contract is non-binding.

Q: Most futures contracts are settled by delivery.

Q: The calendar or time spread is also known as the intramarket spread, and involves contracts for two different settlement months, such as buying a March contract and selling a June contract.

Q: An organized futures exchange standardizes nonstandard forward contracts,establishing such features as contract size, delivery dates, and condition of items that can be delivered. Only the price and number of contracts are left for futures traders to negotiate.

Q: U.S. Futures trading occurs in futures exchanges'trading pits.

Q: Stock-index futures may be settled either by cash or by delivery of securities.

Q: Program trading generally involves positions in both stocks and stock-index futures.

Q: Index arbitrage attempts to exploit the differences between the prices on two different stock indices.

Q: A pension fund holds $10 million in Treasury bonds. In order to protect against a rise in interest rate, the pension fund should use a short hedge in T-bond futures.

Q: An anticipatory hedge is when an investor anticipates a falling market and liquidates his position.

Q: The DJIA is the most popular stock-index futures contract.

Q: With futures, hedging requires one to simply take an opposite position.

Q: Investors can speculate on interest rate declines by purchasing interest rate futures.

Q: In a margin account, if the account balance falls below the maintenance margin, a margin call is triggered.

Q: Most futures contracts are settled by delivery.

Q: Futures contracts are handled by specialists on futures exchanges.

Q: Futures are essentially standardized forward contracts.

Q: The National Futures Association is the federal agency which regulates the futures markets.

Q: Japan, which banned financial futures in 1985, is now very active in developing futures exchanges.

Q: Investors in futures can take either a long, short, or neutral position.

Q: The intermarket spread is also known as a quality spread, involving two different markets, such as buying an NYSE contract and selling an S&P contract for the same month.

Q: According to the Black Scholes (1973) option pricing model, option value is a function of stock price, exercise price, time to maturity, interest rate, and volatility of the underlying asset.

Q: Writing a naked call is potentially riskier than writing a naked put.

Q: There is an positive relationship between the price of a put option and the volatility of the underlying common stock.

Q: If the price of the underlying common stock is less than the exercise price of a call, it is in the money.

Q: If the price of the underlying stock equals the strike price of the call option at maturity, the call buyer has a breakeven transaction.

Q: A protective put is a strategy in which an investor with a long position in stock buys one or more puts.

Q: Options can be purchased on margin.

Q: Options traded on organized exchanges are protected against cash dividends.

Q: The writer of a call, like the buyer of a put, is bearish about the stock price.

Q: The Options Clearing Corporation does not ensure fulfillment of option obligations.

Q: An option buyer has three courses of action available: write a similar option to close the position, exercise the option, or let the option expire unexercised.

Q: The SML can be used to analyze the relationship between risk and required return for a. all assets. b. inefficient portfolios. c. only efficient portfolios. d. only individual securities.

Q: A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk factors

Q: Markowitz derived the efficient frontier as an upward-sloping straight line.

Q: When using the Markowitz model, aggressive investors would select portfolios on the left end of the efficient frontier.

Q: Because of its complexity, the Markowitz model is no longer used by institutional investors.

Q: When constructing a portfolio, standard deviations, expected returns, and correlation coefficients are typically calculated from historical data. Why may that be a problem?

Q: Convertible bonds give their investors the right to convert the bond into common stock whenever they choose.

Q: Most futures contracts are not exercised.

Q: ---------------- represent shares of foreign companies kept in banks. a. convertible bonds b. American Depository Receipts (ADRs) c. asset-backed securities d. LEAPS

Q: An unsecured bond is known as a: a. debenture b. indenture c. mortgage bond d. junk bond

Q: A corporate bond with a rating of BBB- is considered to be which of the following? a. non-investment grade b. investment grade c. speculative grade d. junk, or high-yield

Q: Interest on bonds is typically paid: a. monthly b. quarterly c. semiannually d. annually

Q: Mr. Baker, a single person in early retirement, owns a house, a well-used car, and minimal life insurance. He has pension assets of about half a million dollars. He wants it all in tax-exempt municipal bonds so that "I won't lose any money, and I won't have to pay taxes." Considering the life-cycle theory of asset allocation, would you suggest any alternatives to this client?

Q: Explain the life-cycle theory of portfolio policies.

Q: What is difference between strategic asset allocation and tactical asset allocation?

Q: How does the prudent man rule affect asset allocation?

Q: Give an example of how individual investors' preferences are taken into account by institutional investors?

Q: What are some of the differences between individual investors and institutional investors?

Q: What is the portfolio management process outlined by Maginn and Tuttle.

Q: Portfolio performance evaluation is an important determinant of your success in financial planning.

Q: What is meant by the term "marked to the market"?

Q: In today's world, investor's time horizons have lengthened.

Q: What are the methods of settling a futures contract?

Q: Rebalancing is Difficult for many investors because it represents a contrarian strategy.

Q: Briefly discuss the concept of margin in futures trading.

Q: The spending phase of the life cycle is avoided by investors who follow the prudent man rule.

Q: Compare the obligation entered into in a futures contract to the obligation in an options contract.

Q: Explain a long position and a short position in futures trading.

Q: What is the role of the clearinghouse in futures trading?

Q: Explain the difference between a forward contract and a futures contract.

Q: Basis = a. cash price b. futures price c. cash price + futures price d. cash price - futures price

Q: In the model P/E = (D1/E1)/(k - g), the P/E should increase if the dividend payout rate increases, other things the same. If the payout rate was intentionally increased by the board of directors, other things are likely not to stay the same. What is likely to happen to the dividend growth rate and the required return?

Q: An attempt to exploit the differences between the prices of a stock index future and the prices of a stock index is known as: a. index programming. b. arbitrage speculation. c. index arbitrage. d. program speculation.

Q: What is meant by "quality of earnings," and how does it affect the equity analyst's job?

Q: If an investor strongly believes that the stock market is going to have a sharp decline shortly, he or she could maximize profit by a. short selling stock-index futures contracts. b. hedging current short positions. c. using stock-index futures to straddle the market. d. buying stock-index futures contracts.

Q: How could unexpected inflation affect the P/E ratio?

Q: An investor who sells a Treasury bond futures contract is expecting to profit from a. an increase in the price of the treasury bond. b. an increase in the underlying level of interest rates. c. interest rates remaining unchanged. d. a decrease in the underlying level of interest rates.

Q: Should an investor seek companies with low P/Es or high P/Es?

Q: What three variables affect the P/E ratio? How does each affect it?

Q: Can an investor that wants to use the approach of projected earnings and P/Es find help in Value Line?

Q: What are "earnings surprises?" How do they affect stock prices?

Q: How accurate are professional earnings estimates? Do purely mechanical models give better results than analysts who add subjective assessment to the data?

Q: What is the internal (sustainable) growth rate? How is it calculated?

Q: When an investor buys a share of common stock he/she buys a claim of ownership. How is this claim represented on the balance sheet?

Q: What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?