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Investments & Securities
Q:
Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters.
A. 12
B. 36
C. 60
D. 120
Q:
A single-index model uses __________ as a proxy for the systematic risk factor.
A. a market index, such as the S&P 500
B. the current account deficit
C. the growth rate in GNP
D. the unemployment rate.
Q:
The index model was first suggested by
A. Graham.
B. Markowitz.
C. Miller.
D. Sharpe.
Q:
As diversification increases, the unique risk of a portfolio approaches
A. 1.
B. 0.
C. infinity.
D. (n 1) n.
Q:
As diversification increases, the unsystematic risk of a portfolio approaches
A. 1.
B. 0.
C. infinity.
D. (n 1) n.
Q:
Which of the following portfolio construction methods starts with security analysis?
A. Top-down
B. Bottom-up
C. Middle-out
D. Buy and hold
E. Asset allocation
Q:
Security selection refers to
A. choosing which securities to hold based on their valuation.
B. investing only in "safe" securities.
C. the allocation of assets into broad asset classes.
D. top-down analysis.
Q:
Asset allocation refers to
A. choosing which securities to hold based on their valuation.
B. investing only in "safe" securities.
C. the allocation of assets into broad asset classes.
D. bottom-up analysis.
Q:
The Sarbanes-Oxley Act
A. requires corporations to have more independent directors.
B. requires the firm's CFO to personally vouch for the firm's accounting statements.
C. prohibits auditing firms from providing other services to clients.
D. requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements.
E. All of the above.
Q:
During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to
I) manipulation of financial data to misrepresent the actual condition of the firm.
II) misleading and overly optimistic research reports produced by analysts.
III) allocating IPOs to executives as a quid pro quo for personal favors.
IV) greenmail.
A. II, III, and IV
B. I, II, and IV
C. II and IV
D. I, III, and IV
E. I, II, and III
Q:
Theoretically, takeovers should result in
A. improved management.
B. increased stock price.
C. increased benefits to existing management of the taken-over firm.
D. improved management and increased stock price.
E. All of the options.
Q:
Corporate shareholders are best protected from incompetent management decisions by
A. the ability to engage in proxy fights.
B. management's control of pecuniary rewards.
C. the ability to call shareholder meetings.
D. the threat of takeover by other firms.
E. one-share/one-vote election rules.
Q:
Which of the following are mechanisms that have evolved to mitigate potential agency problems?
I) Using the firm's stock options for compensation
II) Hiring bickering family members as corporate spies
III) Boards of directors forcing out underperforming management
IV) Security analysts monitoring the firm closely
V) Takeover threats
A. II and V
B. I, III, and IV
C. I, III, IV, and V
D. III, IV, and V
E. I, III, and V
Q:
A disadvantage of using stock options to compensate managers is that
A. it encourages managers to undertake projects that will increase stock price.
B. it encourages managers to engage in empire building.
C. it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.
D. All of the above.
Q:
The ____________ refers to the potential conflict between management and shareholders.
A. agency problem
B. diversification problem
C. liquidity problem
D. solvency problem
E. regulatory problem
Q:
Financial assets permit all of the following except
A. consumption timing.
B. allocation of risk.
C. separation of ownership and control.
D. elimination of risk.
Q:
Although derivatives can be used as speculative instruments, businesses most often use them to
A. attract customers.
B. appease stockholders.
C. offset debt.
D. hedge risks.
E. enhance their balance sheets.
Q:
The value of a derivative security
A. depends on the value of the related security.
B. is unable to be calculated.
C. is unrelated to the value of the related security.
D. has been enhanced due to the recent misuse and negative publicity regarding these instruments.
E. is worthless today.
Q:
An example of a derivative security is
A. a common share of Microsoft.
B. a call option on Intel stock.
C. a commodity futures contract.
D. a call option on Intel stock and a commodity futures contract.
E. a common share of Microsoft and a call option on Intel stock.
Q:
Money market securities
A. are short term.
B. are highly marketable.
C. are generally very low risk.
D. are highly marketable and are generally very low risk.
E. All of the options.
Q:
A debt security pays
A. a fixed level of income for the life of the owner.
B. a variable level of income for owners on a fixed income.
C. a fixed or variable income stream at the option of the owner.
D. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.
Q:
A fixed-income security pays
A. a fixed level of income for the life of the owner.
B. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.
C. a variable level of income for owners on a fixed income.
D. a fixed or variable income stream at the option of the owner.
Q:
The domestic net worth of the U.S. in 2016 was
A. $15.411 trillion.
B. $26.431 trillion.
C. $42.669 trillion.
D. $64.747 trillion.
E. $70.983 trillion.
Q:
The smallest component of domestic net worth in 2016 was
A. nonresidential real estate.
B. residential real estate.
C. inventories.
D. consumer durables.
E. equipment and software.
Q:
The largest component of domestic net worth in 2016 was
A. nonresidential real estate.
B. residential real estate.
C. inventories.
D. consumer durables.
E. equipment and software.
Q:
In 2016, _______ of the assets of U.S. households were financial assets as opposed to tangible assets.
A. 20.4%
B. 34.2%
C. 69.4%
D. 71.7%
E. 82.5%
Q:
In 2016, which of the following financial assets make up the greatest proportion of the financial assets held by U.S. households?
A. Pension reserves
B. Life insurance reserves
C. Mutual fund shares
D. Debt securities
E. Personal trusts
Q:
The intrinsic value of an out-of-the-money call option is equal to
A. the call premium.
B. zero.
C. the stock price minus the exercise price.
D. the striking price.
Q:
An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that
A. the call price would increase.
B. the call price would decrease.
C. the call price would not change.
D. the put price would decrease.
E. the put price would not change.
Q:
An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the option has delta of .5, what is its elasticity?
A. 4.17
B. 2.32
C. 1.79
D. 0.5
E. 1.5
Q:
An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call?
A. $8
B. $12
C. $0
D. $4
E. Cannot be determined without more information
Q:
An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the intrinsic value of the call?
A. $12
B. $8
C. $0
D. $23
Q:
Options sellers who are delta-hedging would most likely
A. sell when markets are falling.
B. buy when markets are rising.
C. sell when markets are falling and buy when markets are rising.
D. sell whether markets are falling or rising.
E. buy whether markets are falling or rising.
Q:
Empirical tests of the Black-Scholes option pricing model
A. show that the model generates values fairly close to the prices at which options trade.
B. show that the model tends to overvalue deep in-the-money calls and undervalue deep out-of-the-money calls.
C. indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
D. show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
E. All of the options are correct.
Q:
Use the two-state put-option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is _____, and the hedge ratio is _______.
A. $0 and $40; −4/7
B. $0 and $50; +4/7
C. $0 and $40; +4/7
D. $0 and $50; −4/7
E. $20 and $40; +1/2
Q:
Relative to European puts, otherwise identical American put options
A. are less valuable.
B. are more valuable.
C. are equal in value.
D. will always be exercised earlier.
E. None of the options are correct.
Q:
An American call-option buyer on a nondividend-paying stock will
A. always exercise the call as soon as it is in the money.
B. only exercise the call when the stock price exceeds the previous high.
C. never exercise the call early.
D. buy an offsetting put whenever the stock price drops below the strike price.
E. None of the options are correct.
Q:
Which one of the following variables influences the value of put options?
I) Level of interest rates
II) Time to expiration of the option
III) Dividend yield of underlying stock
IV) Stock price volatility
A. I and IV only
B. II and III only
C. I, II, and IV only
D. I, II, III, and IV
E. I, II, and III only
Q:
Which one of the following variables influences the value of call options?
I) Level of interest rates
II) Time to expiration of the option
III) Dividend yield of underlying stock
IV) Stock price volatility
A. I and IV only
B. II and III only
C. I, II, and IV only
D. I, II, III, and IV
E. I, II, and III only
Q:
A $1 decrease in a call option's exercise price would result in a(n) __________ in the call option's value of __________ one dollar.
A. increase; more than
B. decrease; more than
C. decrease; less than
D. increase; less than
E. increase; exactly
Q:
Lower dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to higher dividend-payout policies.
A. negative; negative
B. positive; positive
C. positive; negative
D. negative; positive
E. zero; zero
Q:
Higher dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend-payout policies.
A. negative; negative
B. positive; positive
C. positive; negative
D. negative; positive
E. zero; zero
Q:
A put option on the S&P 500 Index will best protect a portfolio
A. of 100 shares of IBM stock.
B. of 50 bonds.
C. that corresponds to the S&P 500.
D. of 50 shares of AT&T and 50 shares of Xerox stocks.
E. that replicates the Dow.
Q:
A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is 0.30, and the stock is currently selling for $46, what is the elasticity of the put?
A. 2.76
B. 2.30
C. −7.67
D. −2.76
E. −2.30
Q:
If the hedge ratio for a stock call is 0.70, the hedge ratio for a put with the same expiration date and exercise price as the call would be
A. 0.70.
B. 0.30.
C. −0.70.
D. −0.30.
E. −0.17.
Q:
If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be
A. 0.60.
B. 0.40.
C. −0.60.
D. −0.40.
E. −0.17.
Q:
If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration date and exercise price as the call would be
A. 0.30.
B. 0.50.
C. −0.60.
D. −0.50.
E. −0.17.
Q:
If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be
A. 0.70.
B. 0.30.
C. −0.70.
D. −0.30.
E. −0.17.
Q:
A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratio for the call is 0.6, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?
A. +$700
B. +$500
C. −$580
D. −$520
Q:
A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?
A. −$345
B. +$500
C. −$580
D. −$520
Q:
A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?
A. +$700
B. −$850
C. −$580
D. −$520
Q:
A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?
A. +$700
B. +$500
C. −$1,150
D. −$520
Q:
Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio B consists of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a change in stock price?
A. Portfolio B
B. Portfolio A
C. The two portfolios have the same exposure.
D. Portfolio A if the stock price increases, and portfolio B if it decreases
E. Portfolio B if the stock price increases, and portfolio A if it decreases
Q:
Portfolio A consists of 400 shares of stock and 400 calls on that stock. Portfolio B consists of 500 shares of stock. The call delta is 0.5. Which portfolio has a higher dollar exposure to a change in stock price?
A. Portfolio B
B. Portfolio A
C. The two portfolios have the same exposure.
D. Portfolio A if the stock price increases and portfolio B if it decreases
E. Portfolio B if the stock price increases and portfolio A if it decreases
Q:
Portfolio A consists of 500 shares of stock and 500 calls on that stock. Portfolio B consists of 800 shares of stock. The call delta is 0.6. Which portfolio has a higher dollar exposure to a change in stock price?
A. Portfolio B
B. Portfolio A
C. The two portfolios have the same exposure.
D. Portfolio A if the stock price increases and portfolio B if it decreases
E. Portfolio B if the stock price increases and portfolio A if it decreases
Q:
Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price?
A. Portfolio B
B. Portfolio A
C. The two portfolios have the same exposure.
D. Portfolio A if the stock price increases and portfolio B if it decreases
E. Portfolio B if the stock price increases and portfolio A if it decreases
Q:
Volatility risk is
A. the volatility level for the stock that the option price implies.
B. the risk incurred from unpredictable changes in volatility.
C. the percentage change in the stock call-option price divided by the percentage change in the stock price.
D. the sensitivity of the delta to the stock price.
Q:
Dynamic hedging is
A. the volatility level for the stock that the option price implies.
B. the continued updating of the hedge ratio as time passes.
C. the percentage change in the stock call-option price divided by the percentage change in the stock price.
D. the sensitivity of the delta to the stock price.
Q:
Delta neutral
A. is the volatility level for the stock that the option price implies.
B. is the continued updating of the hedge ratio as time passes.
C. is the percentage change in the stock call-option price divided by the percentage change in the stock price.
D. means the portfolio has no tendency to change value as the underlying portfolio value changes.
Q:
The gamma of an option is
A. the volatility level for the stock that the option price implies.
B. the continued updating of the hedge ratio as time passes.
C. the percentage change in the stock call-option price divided by the percentage change in the stock price.
D. the sensitivity of the delta to the stock price.
Q:
Which of the inputs in the Black-Scholes option pricing model are directly observable?
A. The price of the underlying security
B. The risk-free rate of interest
C. The time to expiration
D. The variance of returns of the underlying asset return
E. The price of the underlying security, risk-free rate of interest, and time to expiration
Q:
All the inputs in the Black-Scholes option pricing model are directly observable except
A. the price of the underlying security.
B. the risk-free rate of interest.
C. the time to expiration.
D. the variance of returns of the underlying asset return.
Q:
The price of a stock call option is __________ correlated with the stock price and __________ correlated with the strike price.
A. positively; positively
B. negatively; positively
C. negatively; negatively
D. positively; negatively
E. not; not
Q:
The price of a stock put option is __________ correlated with the stock price and __________ correlated with the strike price.
A. positively; positively
B. negatively; positively
C. negatively; negatively
D. positively; negatively
E. not; not
Q:
Other things equal, the price of a stock put option is negatively correlated with which of the following factors?
A. The stock price
B. The time to expiration
C. The stock volatility
D. The exercise price
E. The time to expiration, stock volatility, and exercise price
Q:
Other things equal, the price of a stock put option is positively correlated with which of the following factors?
A. The stock price
B. The time to expiration
C. The stock volatility
D. The exercise price
E. The time to expiration, stock volatility, and exercise price
Q:
Other things equal, the price of a stock put option is positively correlated with the following factors except
A. the stock price.
B. the time to expiration.
C. the stock volatility.
D. the exercise price.
Q:
Other things equal, the price of a stock call option is negatively correlated with which of the following factors?
A. The stock price
B. The time to expiration
C. The stock volatility
D. The exercise price
E. The stock price, time to expiration, and stock volatility
Q:
Other things equal, the price of a stock call option is positively correlated with which of the following factors?
A. The stock price
B. The time to expiration
C. The stock volatility
D. The exercise price
E. The stock price, time to expiration, and stock volatility
Q:
Other things equal, the price of a stock call option is positively correlated with the following factors except
A. the stock price.
B. the time to expiration.
C. the stock volatility.
D. the exercise price.
Q:
If the stock price decreases, the price of a put option on that stock __________, and that of a call option __________.
A. decreases; increases
B. decreases; decreases
C. increases; decreases
D. increases; increases
E. does not change; does not change
Q:
The value of a stock put option is positively related to the following factors except
A. the time to expiration.
B. the striking price.
C. the stock price.
D. All of the options are correct.
E. None of the options are correct.
Q:
All of the following factors affect the price of a stock option except
A. the risk-free rate.
B. the riskiness of the stock.
C. the time to expiration.
D. the expected rate of return on the stock.
E. None of the options are correct.
Q:
Which of the following factors affect the price of a stock option?
A. The risk-free rate
B. The riskiness of the stock
C. The time to expiration
D. The expected rate of return on the stock
E. The risk-free rate, riskiness of the stock, and time to expiration
Q:
Before expiration, the time value of a call option is equal to
A. zero.
B. the actual call price minus the intrinsic value of the call.
C. the intrinsic value of the call.
D. the actual call price plus the intrinsic value of the call.
Q:
You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as
A. a vertical spread.
B. a straddle.
C. a time spread.
D. a collar.
Q:
You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as
A. a long straddle.
B. a horizontal spread.
C. a money spread.
D. a short straddle.
E. None of the options are correct.
Q:
Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share
A. increases to $204.
B. decreases to $190.
C. increases to $206.
D. decreases to $196.
E. None of the options are correct.
Q:
Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share
A. increases to $504.
B. decreases to $490.
C. increases to $506.
D. decreases to $496.
E. None of the options are correct.
Q:
A protective put strategy is
A. a long put plus a long position in the underlying asset.
B. a long put plus a long call on the same underlying asset.
C. a long call plus a short put on the same underlying asset.
D. a long put plus a short call on the same underlying asset.
E. None of the options are correct.