You own $75,000 worth of stock, and you are worried the price may fall by year-end in
6 months. You are considering using either puts or calls to hedge this position. Given
this, which of the following statements is (are) correct?
I. One way to hedge your position would be to buy puts.
II. One way to hedge your position would be to write calls.
III. If major stock price declines are likely, hedging with puts is probably better than
hedging with short calls.
A. I only
B. II only
C. I and III only
D. I, II, and III
All other things equal, a bond’s duration is _________.
A. higher when the yield to maturity is higher
B. lower when the yield to maturity is higher
C. the same at all yield rates
D. indeterminable when the yield to maturity is high
Harry Markowitz is best known for his Nobel Prize-winning work on _____________.
A. strategies for active securities trading
B. techniques used to identify efficient portfolios of risky assets
C. techniques used to measure the systematic risk of securities
D. techniques used in valuing securities options
_______________ % of the variance is explained by this regression.
A. 12
B. 35
C. 4.05
D. 80
All else the same, an American-style option will be ______ valuable than a ______
style option.
A. more; European-
B. less; European-
C. more; Canadian-
D. less; Canadian-
When computing the bank discount yield, you would use ____ days in the year.
A. 260
B. 360
C. 365
D. 366
On January 1, you sold one April S&P 500 Index futures contract at a futures price of
1,300. If the April futures price is 1,250 on February 1, your profit would be
__________ if you close your position. (The contract multiplier is 250.)
A. -$12,500
B. -$15,000
C. $15,000
D. $12,500
The stock price of Bravo Corp. is currently $100. The stock price a year from now will
be either $160 or $60 with equal probabilities. The interest rate at which investors
invest in riskless assets is 6%. Using the binomial OPM, the value of a put option with
an exercise price of $135 and an expiration date 1 year from now should be worth
__________ today.
A. $34.09
B. $37.50
C. $38.21
D. $45.45
The goal of supply-side policies is to _______.
A. increase government involvement in the economy
B. create an environment where workers and owners of capital have the maximum
incentive and ability to produce and develop goods
C. maximize tax revenues of the government
D. focus more on wealth redistribution policies
Which of the following is a correct expression concerning the formula for the standard
deviation of returns of a two-asset portfolio where the correlation coefficient is
positive?
A. σ2rp < (W1
2σ1
2 + W2
2σ2
2)
B. σ2rp = (W1
2σ1
2 + W2
2σ2
2)
C. σ2rp = (W1
2σ1
2 – W2
2σ2
2)
D. σ2rp > (W1
2σ1
2 + W2
2σ2
2)
The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a
market price of $625 is _____.
A. 4.8%
B. 6.1%
C. .%
D. 10.4%
The possibility that you are too conservative and your money doesn’t grow fast enough
to keep pace with inflation is called ________.
A. purchasing power risk
B. liquidity risk
C. timing risk
D. market risk
A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the
yield to maturity falls to 7.84%, you would predict that the new value of the bond will
be approximately _________.
A. $1,035
B. $1,036
C. $1,094
D. $1,124
Which of the following statements is false?
A. Bond prices and yields are inversely related.
B. An increase in a bond’s YTM results in a smaller price change than a decrease in
yield of equal magnitude.
C. Prices of short-term bonds tend to be more sensitive to interest rate changes than
prices of long-term bonds.
D. Interest rate risk is inversely related to the bond’s coupon rate.
Which of the following is not a true statement regarding municipal bonds?
A. A municipal bond is a debt obligation issued by state or local governments.
B. A municipal bond is a debt obligation issued by the federal government.
C. The interest income from a municipal bond is exempt from federal income taxation.
D. The interest income from a municipal bond is exempt from state and local taxation in
the issuing state.
A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the
1-year risk-free rate is 3%. Based on the above data, which of the following set of
transactions will yield positive riskless arbitrage profits?
A. Buy gold in the spot with borrowed money, and sell the futures contract.
B. Buy the futures contract, and sell the gold spot and invest the money earned.
C. Buy gold spot with borrowed money, and buy the futures contract.
D. Buy the futures contract, and buy the gold spot using borrowed money.
Assume that the Federal Reserve increases the money supply. This will cause:
I. Interest rates to decrease
II. Consumption and investment to decrease
III. Inflation to fall
A. I only
B. I and II only
C. II and III only
D. I, II, and III
Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his
friends are invested in. Shelly invests in a portfolio that is totally different from the
portfolios of all her friends. Both Bill’s and Shelly’s stocks fall 15%. According to regret
theory,
_________________________________________.
A. Bill will have more regret over the loss than Shelly
B. Shelly will have more regret over the loss than Bill
C. Bill and Shelly will have equal regret over their losses
D. Bill’s and Shelly’s risk aversion will increase in the future
If the interest rate on debt is higher than the ROA, then a firm’s ROE will _________.
A. decrease
B. increase
C. not change
D. change but in an indeterminable manner
An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%.
What is the current yield on this bond?
A. 4.8%
B. 4.85%
C. 9.6%
D. 9.%
_______ is a life insurance policy that will provide a death benefit only and has no
savings plan.
A. Term life
B. Whole life
C. Variable life
D. Universal life
You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual
payment coupon. In 1 year promised yields have risen to %. Your 1-year holding-period
return was ___.
A. .61%
B. -5.39%
C. 1.28%
D. -3.25%
Which one of the following is not likely to be subject to adverse selection?
A. Health insurance providers
B. Lifetime annuity providers
C. Life insurance providers
D.
Cost of goods sold refers to ___________.
A. direct costs attributable to producing the product sold by the firm
B. salaries, advertising, and selling expenses
C. payments to the firm’s creditors
D. payments to federal and local governments
The market share held by the NYSE Arca system in February 2011 was approximately
____.
A. 65%
B. 45%
C. 25%
D. 10%
An example of a real asset is:
I. A college education
II. Customer goodwill
III. A patent
A. I only
B. II only
C. I and III only
D. I, II, and III
Which one of the following is probably the most direct and immediate way to stimulate
or slow the economy, although it is not very useful for fine-tuning economic
performance?
A. fiscal policy
B. monetary policy
C. supply-side policy
D. rising minimum wages
In the Black-Scholes model, as the stock’s price increases, the values of N(d1) and N(d2)
will _______ for a call and
_______ for a put option.
A. increase; decrease
B. increase; increase
C. decrease; increase
D. decrease; decrease
The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If
the stock paid a $2.50 dividend, what is the holding-period return for the year?
A. 6.58%
B. 8.86%
C. 14.47%
D. 18.66%
One can profit from an arbitrage opportunity by
A. taking a long position in the cheaper market and a short position in the expensive
market.
B. taking a short position in the cheaper market and a long position in the expensive
market.
C. taking a long position in both markets.
D. taking a short position in both markets .
A put option with several months until expiration has a strike price of $55 when the
stock price is $50. The option has _____
intrinsic value and _____ time value.
A. negative; positive
B. positive; positive
C. zero; zero
D. zero; positive
The Black-Scholes option-pricing formula was developed for __________.
A. American options
B. European options
C. Tokyo options
D. out-of-the-money options
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 18% and a standard deviation of return of 20%. Stock B has an
expected return of 14% and a standard deviation of return of 5%. The correlation
coefficient between the returns of A and B is .50. The risk-free rate of return is 10%.
The proportion of the optimal risky portfolio that should be invested in stock A is
_________.
A. 0%
B. 40%
C. 60%
D. 100%