Investment Management - Exam 2 - University of Iowa - Jeff Hart
According to the CAPM, what is the required rate of return for a stock with a beta of .7, when the risk-free rate is 7% and the expected market rate of return is 14%? A. 11.9% B. 14% C. 16.8%
11.9%
According to the CAPM, what is the expected rate of return for a stock with a beta of 1.2, when the risk-free rate is 6% and the market rate of return is 12%? A. 7.2% B. 12% C. 13.2%
13.2%
The covariance of the market's return with a stock's return is .005 and the standard deviation of the mark's return is .05. What is the stock's beta? A. 1.0 B. 1.5 C. 2.0
2.0
Sharpe ratio
(Arithmetic Average - Risk Free Rate) / (Standard Deviation)
First option exchange
Chicago Board of Options Exchange (CBOE) 1973
Option Premium
How much you pay for the option - gives you the right to buy the option at the strike price
Beta
Measures the systematic risk
Covered Call
Own the stock and write the call
How were options traded prior to 1973?
Phone
Exercising option
Taking it at stock price
Strike or Exercise price
The specific price in an option
What is the risk measure associate with the capital market line (CML)? A. Beta Risk B. Unsystematic Risk C. Total Risk
Total Risk
Call Options
You buy the right to purchase an asset (i.e., stock) at a specific price during a specific time period
Put Option
You buy the right to sell an asset at a specific price during a specific time period
A portfolio to the right of the market portfolio on the CML is? A. a lending portfolio B. a borrowing portfolio C. an inefficient portfolio
a borrowing portfolio
A customized agreement to purchase a certain T-bond next Thursday for $1,000 is: A. an option B. a futures contract C. a forward commitment
a forward commitment
A swap is: A. highly regulated B. a series of forward contracts C. the exchange of one asset for another
a series of forward contracts
For which of the following indexes will rebalancing occur most frequently? A. a price-weighted index B. an equal-weighted index C. a market capitalization-weighted index
an equal-weighted index
As the number of stocks in a portfolio increases, the portfolio's systematic risk: A. can increase or decrease B. decreases at a decreasing rate C. decreases at an increasing rate
can increase or decrease
Which of the following would most likely represent an inappropriate use of an index? A. as a reflection of market sentiment B. comparing a small-cap manager against a broad market C. using the CAPM to determine the expected return and beta
comparing a small-cap manager against a broad market
Which of the following is least accurate regarding fixed income indexes? A. replicating the return on a fixed income security index is difficult for investors B. there is a great deal of heterogeneity in the composition of fixed income security indexes C. due to the large universe of income security issues, data for fixed income securities are relatively easy to obtain
due to the large universe of income security issues, data for fixed income securities are relatively easy to obtain
Which of the following most accurately describes a derivative security? A. always increases risk B. has no expiration date C. has a payoff based on another asset
has a payoff based on another asset
Derivatives are least likely to provide or improve: A. liquidity B. price information C. inflation reduction
inflation reduction
Most of the widely used global security indexes are: A. price-weighted B. equal-weighted C. market capitalization-weighted
market capitalization-weighted
Market float of a stock is best described as its: A. total outstanding shares B. shares that are available to domestic investors C. outstanding shares excluding those held by controlling shareholders
outstanding shares excluding those held by controlling shareholders
A stock with a beta of .7 currently priced at $50 is expected to increase in price to $55 by year end and pay a $1 dividend. The expected market return is 15%, and the risk-free rate is 8%. The stock is: A. overpriced, so do not buy it B. underpriced, so buy it C. properly priced, so buy it
overpriced, so do not buy it
Which of the following statements about the SML and the CML is least accurate? A. securities that plot above the SML are undervalued B. investors expect to be compensated for systematic risk C. securities that plot on the SML have no value to investors
securities that plot on the SML have no value to investors
Total risk equals: A. unique plus diversifiable risk B. market plus nondiversifiable risk C. systematic plus unsystematic risk
systematic plus unsystematic risk
A call option gives the holder: A. the right to sell at a specific price B. the right to buy at a specific price C. an obligation to sell at a certain price
the right to buy at a specific price
Which of the following statements about exchange-traded derivatives is least accurate? A. they are liquid B. they are standardized contracts C. they carry significant default risk
they carry significant default risk
Arbitrage prevents: A. market efficiency B. profit higher than the risk-free rate of return C. two assets with identical payoffs from selling at different prices
two assets with identical payoffs from selling at different prices
The risk-free rate is 6% and the expected market return is 15%. A stock with a beta of 1.2 selling for $25 and will pay a $1 dividend at the end of the year. If the stock is priced at $30 at year-end, it is: A. overpriced, so short it B. underpriced, so buy it C. underpriced, so short it
underpriced, so buy it
Naked Call
writing the call without owning the stock