Investments Final

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

A

2. The _______ decision should take precedence over the _____ decision. A. asset allocation; stock selection B. bond selection; mutual fund selection C. stock selection; asset allocation D. stock selection; mutual fund selection

A

A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of ______ and a time value of _____. A. $5; $1.50 B. $1.50; $5 C. $0; $6.50 D. $6.50; $0

A

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

A

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-

A

An American call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

A

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability (Sharpe) ratio? A. .40 B. .50 C. .75 D. .80

A

Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect_____________. A. an abnormal price change immediately after the announcement B. an abnormal price increase before the announcement C. an abnormal price decrease after the announcement D. no abnormal price change before or after the announcement

A

At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration. A. max (0, ST - X) B. min (0, ST - X) C. max (0, X - ST) D. min (0, X - ST)

A

If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A. semistrong B. strong C. weak D. perfect

A

If you have an extremely "bullish" outlook on the stock market, you could attempt to maximize your rate of return by________________. A. purchasing out-of-the-money call options B. purchasing at-the-money bull spreads C. purchasing in-the-money call options D. purchasing at-the-money call options

A

One type of passive portfolio management is ________. A. investing in a well-diversified portfolio without attempting to search out mispriced securities B. investing in a well-diversified portfolio while only seeking out passively mispriced securities C. investing an equal dollar amount in index stocks D. investing in an equal amount of shares in each of the index stocks

A

The intrinsic value of a call option is equal to _______________. A. the stock price minus the exercise price B. the exercise price minus the stock price C. the stock price minus the exercise price plus any expected dividends D. the exercise price minus the stock price plus any expected dividends

A

The market risk premium is defined as __________. A. the difference between the return on an index fund and the return on Treasury bills B. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

A

The maximum loss a buyer of a stock call option can suffer is the _________. A. call premium B. stock price C. stock price minus the value of the call D. strike price minus the stock price

A

The reward-to-volatility ratio is given by _________. A. the slope of the capital allocation line B. the second derivative of the capital allocation line C. the point at which the second derivative of the investor's indifference curve reaches zero D. the portfolio's excess return

A

The value of a put option increases with all of the following except ___________. A. stock price B. time to maturity C. volatility D. dividend yield

A

The weak form of the EMH states that ________ must be reflected in the current stock price. A. all past information, including security price and volume data B. all publicly available information C. all information, including inside information D. all costless information

A

Which one of the following measures time-weighted returns and allows for compounding? A. geometric average return B. arithmetic average return C. dollar-weighted return D. historical average return

A

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. A. covered call B. long straddle C. naked call D. money spread

A

You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option. A. max (-C0, ST - X - C0) B. min (-C0, ST - X - C0) C. max (C0, ST - X + C0) D. max (0, ST - X - C0)

A

The writer of a put option _______________. A. agrees to sell shares at a set price if the option holder desires B. agrees to buy shares at a set price if the option holder desires C. has the right to buy shares at a set price D. has the right to sell shares at a set price

B

2. The ______ measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar-weighted

B

A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period. A. nominal model B. binomial model C. time model D. Black-Scholes model

B

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________. A. at the money B. in the money C. out of the money D. knocked in

B

A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund. A. stock B. index C. hedge D. money market

B

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. A. 23% B. 19.76% C. 18.45% D. 17.67%

B

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________. A. at the money B. in the money C. out of the money D. knocked out

B

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

B

All else equal, call option values are _____ if the _____ is lower. A. higher; stock price B. higher; exercise price C. lower; dividend payout D. lower; stock volatility

B

Choosing stocks by searching for predictable patterns in stock prices is called ________. A. fundamental analysis B. technical analysis C. index management D. random-walk investing

B

Diversification is most effective when security returns are _________. A. high B. negatively correlated C. positively correlated D. uncorrelated

B

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

B

If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? A. 5.48% B. 8.74% C. 9% D. 12%

B

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders. A. semistrong B. strong C. weak D. perfect

B

In 1973, trading of standardized options on a national exchange started on the _________. A. AMEX B. CBOE C. NYSE D. CFTC

B

Longer-term American-style options with maturities of up to 3 years are called __________. A. warrants B. LEAPS C. GICs D. CATs

B

Market risk is also called __________ and _________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

B

Published data on past returns earned by mutual funds are required to be ______. A. dollar-weighted returns B. geometric returns C. excess returns D. index returns

B

Stock market analysts have tended to be ___________ in their recommendations to investors. A. slightly overly optimistic B. overwhelmingly optimistic C. slightly overly pessimistic D. overwhelmingly pessimistic

B

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolios tend to move inversely B. the returns on the stock and bond portfolios tend to vary independently of each other C. the returns on the stock and bond portfolios tend to move together D. the covariance of the stock and bond portfolios will be positive

B

The Black-Scholes option-pricing formula was developed for __________. A. American options B. European options C. Tokyo options D. out-of-the-money options

B

The arithmetic average of -11%, 15%, and 20% is ________. A. 15.67% B. 8% C. 11.22% D. 6.45%

B

The excess return is the _________. A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury-bill rate C. rate of return to risk aversion D. index return

B

The holding period return on a stock is equal to _________. A. the capital gain yield over the period plus the inflation rate B. the capital gain yield over the period plus the dividend yield C. the current yield plus the dividend yield D. the dividend yield plus the risk premium

B

The risk that can be diversified away is __________. A. beta B. firm-specific risk C. market risk D. systematic risk

B

The semistrong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information, including inside information D. all costless information

B

Which of the following correlation coefficients will produce the most diversification benefits? A. -.6 B. -.9 C. 0 D. .4

B

Which of the following is not a method employed by fundamental analysts? A. analyzing the Fed's next interest rate move B. relative strength analysis C. earnings forecasting D. estimating the economic growth rate

B

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return

B

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

C

A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of___. A. .22 B. .60 C. .42 D. .25

C

An American put option gives its holder the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

C

At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration. A. max (0, ST - X) B. min (0, ST - X) C. max (0, X - ST) D. min (0, X - ST)

C

Beta is a measure of security responsiveness to _________. A. firm-specific risk B. diversifiable risk C. market risk D. unique risk

C

Evidence supporting semistrong-form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securities B. rely on fundamental analysis to select securities C. use a passive trading strategy such as purchasing an index fund or an ETF D. select securities by throwing darts at the financial pages of the newspaper

C

Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms. A. the same B. lower C. higher D. none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

C

Proponents of the EMH typically advocate __________. A. a conservative investment strategy B. a liberal investment strategy C. a passive investment strategy D. an aggressive investment strategy

C

The _________ is the difference between the actual call price and the intrinsic value. A. stated value B. strike value C. time value D. binomial value

C

The geometric average of -12%, 20%, and 25% is _________. A. 8.42% B. 11% C. 9.7% D. 18.88%

C

The primary objective of fundamental analysis is to identify __________. A. well-run firms B. poorly run firms C. mispriced stocks D. high P/E stocks

C

The strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information, including inside information D. all costless information

C

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A. -1 B. 0 C. 1 D. .15

C

Which of the following is not a method employed by followers of technical analysis? A. charting B. relative strength analysis C. earnings forecasting D. trading around support and resistance levels

C

You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH. A. semistrong B. strong C. weak D. perfect

C

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. A. long straddle B. naked put C. protective put D. short stroll

C

You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________. A. -3.57% B. -3.45% C. 4.31% D. 8.03%

C

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________. A. more than 18% but less than 24% B. equal to 18% C. more than 12% but less than 18% D. equal to 12%

C

1. Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options

D

1. You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%

D

A call 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; negative C. zero; zero D. zero; positive

D

A stock with a current market price of $50 and a strike price of $45 has an associated put option priced at $3.50. This put has an intrinsic value of ______ and a time value of _____. A. $3.50; $0 B. $5; $3.50 C. $3.50; $5 D. $0; $3.50

D

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A. 2-4 B. 4-6 C. 8-12 D. 20-35

D

Firm-specific risk is also called __________ and __________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

D

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. market risk B. nondiversifiable risk C. systematic risk D. unique risk

D

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A. market risk B. unique risk C. unsystematic risk D. none of these options (With a correlation of 1, no risk will be reduced.

D

Of the variables in the Black-Scholes OPM, the __________ is not directly observable. A. price of the underlying asset B. risk-free rate of interest C. time to expiration D. variance of the underlying asset return

D

Proponents of the EMH think technical analysts __________. A. should focus on relative strength B. should focus on resistance levels C. should focus on support levels D. are wasting their time

D

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach? A. Active management B. Arbitrage C. Fundamental analysis D. Passive investment

D

The dollar-weighted return is the _________. A. difference between cash inflows and cash outflows B. arithmetic average return C. geometric average return D. internal rate of return

D

The potential loss for a writer of a naked call option on a stock is _________. A. equal to the call premium B. larger the lower the stock price C. limited D. unlimited

D

The value of a call option increases with all of the following except ___________. A. stock price B. time to maturity C. volatility D. dividend yield

D

Which of the following beliefs would not preclude charting as a method of portfolio management? A. The market is strong-form efficient. B. The market is semistrong-form efficient. C. The market is weak-form efficient. D. Stock prices follow recurring patterns.

D

Which of the following correlation coefficients will produce the least diversification benefit? A. -.6 B. -.3 C. 0 D. .8

D

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment? A. 12.8% B. 11% C. 8.9% D. 9.2%

D

______ option can only be exercised on the expiration date. A. A Mexican B. An Asian C. An American D. A European

D

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a higher risk premium than security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.

I and II

Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I,III,II,IV

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I,III,II,IV