Research suggests that option-pricing models that allow for the possibility of
___________ provide more accurate pricing than does the basic Black-Scholes
option-pricing model.
I. early exercise
II. changing expected returns of the stock
III. time varying stock price volatility
A. II only
B. I and III only
C. II and III only
D. I, II, and III
A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years.
If the yield to maturity of the bond is 6.7%, what is the duration of the bond?
A. 6.7 years
B. 8 years
C. 10 years
D. 13 years
The U.K. stock index is the _________.
A. DAX
B. FTSE
C. GSE
D. TSE
Consider a Treasury bill with a rate of return of 5% and the following risky securities:
Security A: E(r) = .15; variance = .0400
Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000
Security D: E(r) = .13; variance = .0625
The investor must develop a complete portfolio by combining the risk-free asset with
one of the securities mentioned above. The security the investor should choose as part
of her complete portfolio to achieve the best CAL would be _________.
A. security A
B. security B
C. security C
D. security D
You can tax-shelter only one-half of your retirement savings. You want to invest
one-half of your savings in bonds and one-half in stocks. How much of the bonds and
how much of the stocks should you allocate to the tax-sheltered investment?
A. Stock and bond investments should be equally invested in both tax-sheltered and
non-sheltered accounts.
B. You should place all the stocks in tax-sheltered accounts and all the bonds in
non-sheltered accounts.
C. You should place all the bonds in tax-sheltered accounts and all the stocks in
non-sheltered accounts.
D. It makes no difference how you allocate your stock and bond investments among tax
sheltered and non-sheltered accounts.
Consider the following $1,000 par value zero-coupon bonds:
The expected 1-year interest rate 2 years from now should be _________.
A. %
B. 8%
C. 9%
D. 10%
The term “underwriting syndicate” describes _______.
A. the issuing firm
B. the lead underwriter
C. the investment banks that participate in the underwriting
D. the private investors that purchase the shares
Why is the holder of an option not required to post margin under the Option Clearing
Corporation rules?
A. Once an option is purchased, no further money is at risk.
B. The seller pays all costs.
C. The credit worthiness of the holder covers all potential losses.
D. The holder must post securities instead of margin.
You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium
of $3 each. You hold the position until the expiration date, when IBM stock sells for
$95 per share. You will realize a ______ on this strip.
A. $300 profit
B. $100 loss
C. $500 profit
D. $200 profit
Interest rate swaps involve the exchange of ________________.
A. actual fixed-rate bonds for actual floating-rate bonds
B. actual floating-rate bonds for actual fixed-rate bonds
C. net interest payments and an actual principal swap
D. net interest payments based on notional principal, but no exchange of principal
You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of
$3. You hold the option until the expiration date, when MBI stock sells for $123 per
share. You will realize a ______ on the investment.
A. $300 profit
B. $300 loss
C. $500 loss
D. $200 profit
The Social Security system _______________.
A. is financed in a regressive way
B. is regressive in the way it allocates benefits
C. is progressive in the way it is financed
D. is fully funded for the foreseeable future
After considering current market conditions, an investor decides to place 60% of her
funds in equities and the rest in bonds. This is an example of _____ .
A. asset allocation
B. security analysis
C. top-down portfolio management
D. passive management
A major cause of the mortgage market meltdown in 2007 and 2008 was linked to
________.
A. private equity investments
B. securitization
C. negative analyst recommendations
D. online trading
A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at
this P/E and earnings fail to grow at all, how long should you expect it to take to just
recover the cost of your investment?
A. 27 years
B. 37 years
C. 55 years
D. 75 years
At expiration of an option contract, which phrase describes the point at which both calls
and puts have the same gross profit?
A. at the money
B. in the money
C. out of the money
D. knocked in
The minimum tick size, or spread between prices in the Treasury bond market, is
A. 1/8 of a point.
B. 1/16 of a point.
C. 1/32 of a point.
D. 1/128 of a point.
What combination of puts and calls can simulate a long stock investment?
A. long call and short put
B. long call and long put
C. short call and short put
D. short call and long put
A futures call option provides its holder with the right to ___________.
A. purchase a particular stock at some time in the future at a specified price
B. purchase a futures contract for the delivery of options on a particular stock
C. purchase a futures contract at a specified price for a specified period of time
D. deliver a futures contract and receive a specified price at a specific date in the future
Which one of the following ratios is used to calculate the times-interest-earned ratio?
A. Net profit/Interest expense
B. Pretax profit/EBIT
C. EBIT/Sales
D. EBIT/Interest expense
You decide to purchase an equal number of shares of stocks of firms to create a
portfolio. If you wanted to construct an index to track your portfolio performance, your
best match for your portfolio would be to construct ______.
A. a value-weighted index
B. an equally weighted index
C. a price-weighted index
D. a bond price index
The yield on tax-exempt bonds is ______.
A. usually less than 50% of the yield on taxable bonds
B. normally about 90% of the yield on taxable bonds
C. greater than the yield on taxable bonds
D. less than the yield on taxable bonds
71. An investor purchases a long call at a price of $2.50. The price at expiration is $35.
If the current stock price is $35.10, what is the break-even point for the investor?
A. $32.50
B. $35
C. $37.50
D. $37.60
You buy a home for $200,000 with a 25 year, 4.5% mortgage. The value of the home
rises from $200,000 to $250,000 over the course of 25 years. Assume any tax benefits
from home ownership equal the cost of maintaining the home.
A. $56,721 less with renting
B. $5632,721 more with renting
C.$24,547 more with renting
D. $24,547 less with renting
Trading activity and average returns in brokerage accounts tend to be _________.
A. uncorrelated
B. negatively correlated
C. positively correlated
D. positively correlated for women and negatively correlated for men
You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per
quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P
500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the
stock market may fall and you want to hedge your portfolio by selling 3-month S&P
500 future contracts. The S&P contract multiplier is $250.
How many S&P 500 contracts do you need to sell to hedge your portfolio?
A. 25
B. 35
C. 50
D. 60
The __________ is the stock price minus exercise price, or the profit that could be
attained by immediate exercise of an in-the-money call option.
A. intrinsic value
B. time value
C. stated value
D. discounted value
You would like to hold a protective put position on the stock of Avalon Corporation to
lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50.
Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill
rate is 5%. Unfortunately, no put options are traded on Avalon Co.
Suppose the desired put options with X = 50 were traded. How much would it cost to
purchase?
A. $1.19
B. $2.38
C. $5
D. $3.33
According to the capital asset pricing model, a security with a _________.
A. negative alpha is considered a good buy
B. positive alpha is considered overpriced
C. positive alpha is considered underpriced
D. zero alpha is considered a good buy
The average depth of the limit order book is _____.
A. lower for the large stocks in the S&P 500 Index than for the smaller stocks in the
Russell 2000 Index
B. higher for the large stocks in the S&P 500 Index than for the smaller stocks in the
Russell 2000 Index
C. about the same for both the large stocks in the S&P 500 Index and the smaller stocks
in the Russell 2000 Index
D. unrelated to the sizes of the stocks in the indexes
A stock index spot price is $1,350. The zero coupon interest rate is 2.6%. What is the
potential arbitrage profit if the 6-month futures contract on the index is priced at
$1,342?
A. $8
B. $25
C. $32
D. $39