Investments Final

What is the primary advantage of adding foreign securities to your portfolio?

Diversification

7. _________ is equal to (common shareholders' equity/common shares outstanding). A) Book value per share B) Liquidation value per share C) Market value per share D) Tobin's Q E) none of the above

A) Book value per share

28. 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 above.

A) a long put plus a long position in the underlying asset.

19. An American put option can be exercised A) any time on or before the expiration date. B) only on the expiration date. C) any time in the indefinite future. D) only after dividends are paid. E) none of the above.

A) any time on or before the expiration date.

34. If the stock price increases, 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

A) decreases, increases

6. High P/E ratios tend to indicate that a company will _______, ceteris paribus. A) grow quickly B) grow at the same speed as the average company C) grow slowly D) not grow E) none of the above

A) grow quickly

9. Recent empirical research indicates _______. A) that real rates of return on stocks are positively correlated with inflation B) that real rates of return on stocks are uncorrelated with inflation C) that real rates of return on stocks are negatively correlated with inflation D) the ratio of the real rate of return on stocks to inflation is 1.0 E) nothing about real rates of return on stocks

A) that real rates of return on stocks are positively correlated with inflation

31. Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call? A) $17.50 B) $15.26 C) $10.36 D) $12.26 E) none of the above.

B) $15.26

8. ________ are analysts who use information concerning current and prospective profitability of a firms to assess the firm's fair market value. A) Credit analysts B) Fundamental analysts C) Systems analysts D) Technical analysts E) Specialists

B) Fundamental analysts

37. A futures contract A) is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. B) is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract. C) gives the buyer the right, but not the obligation, to buy an asset some time in the future. D) is a contract to be signed in the future by the buyer and the seller of the commodity. E) none of the above.

B) is an agreement to buy or sell a specified amount of an asset at a predetermined price

20. A European call option can be exercised A) any time in the future. B) only on the expiration date. C) if the price of the underlying asset declines below the exercise price. D) immediately after dividends are paid. E) none of the above.

B) only on the expiration date.

33. Before expiration, the time value of an in the money stock option is always A) equal to zero. B) positive. C) negative. D) equal to the stock price minus the exercise price. E) none of the above.

B) positive.

3. If the currency of your country is depreciating, the result should be to ______ exports and to _______ imports. A) stimulate, stimulate B) stimulate, discourage C) discourage, stimulate D) discourage, discourage E) not affect, not affect

B) stimulate, discourage

27. According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to: A) the call value plus the present value of the exercise price plus the stock price. B) the call value plus the present value of the exercise price minus the stock price. C) the present value of the stock price minus the exercise price minus the call price. D) the present value of the stock price plus the exercise price minus the call price. E) none of the above.

B) the call value plus the present value of the exercise price minus the stock price.

25. The Option Clearing Corporation is owned by A) the Federal Reserve System. B) the exchanges on which stock options are traded. C) the major U. S. banks. D) the Federal Deposit Insurance Corporation. E) none of the above.

B) the exchanges on which stock options are traded.

22. A put option on a stock is said to be out of the money if A) the exercise price is higher than the stock price. B) the exercise price is less than the stock price. C) the exercise price is equal to the stock price. D) the price of the put is higher than the price of the call. E) the price of the call is higher than the price of the put.

B) the exercise price is less than the stock price.

14. Investors want high plowback ratios A) for all firms. B) whenever ROE > k. C) whenever k > ROE. D) only when they are in low tax brackets. E) whenever bank interest rates are high.

B) whenever ROE > k.

13. Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Dominion Oil stock should be _____. A) $28.12 B) $35.55 C) $60.00 D) $72.00 E) none of the above

C) $60.00

10. Construction Machinery Company has an expected ROE of 11%. The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends. A) 3.0% B) 4.8% C) 8.25% D) 9.0% E) none of the above

C) 8.25%

36. Which Excel formula is used to execute the Black-Scholes option pricing model? A) NORMAL B) ABNORMAL C) NORMSDIST D) DIST E) NORMALDIST

C) NORMSDIST

4. Some successful principles for stock picking according to Malkiel are: A) Don't ignore the trend B) Buy value stocks C) Trade as little as possible D) A and B E) A and C

C) Trade as little as possible

24. Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. A) are; are not B) are; are C) are not; are D) are not; are not E) are always; are sometimes

C) are not; are

38. The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized. A) are; are B) are not; are C) are; are not D) are not; are not E) are; may or may not be

C) are; are not

40. In a futures contract the futures price is A) determined by the buyer and the seller when the delivery of the commodity takes place. B) determined by the futures exchange. C) determined by the buyer and the seller when they initiate the contract. D) determined independently by the provider of the underlying asset. E) none of the above.

C) determined by the buyer and the seller when they initiate the contract.

21. All else equal, call option values are lower A) in the month of May. B) for low dividend payout policies. C) for high dividend payout policies. D) A and B. E) A and C.

C) for high dividend payout policies.

15. Low P/E ratios tend to indicate that a company will _______, ceteris paribus. A) grow quickly B) grow at the same speed as the average company C) grow slowly D) P/E ratios are unrelated to growth E) none of the above

C) grow slowly

23. The maximum loss a buyer of a stock call option can suffer is equal to A) the striking price minus the stock price. B) the stock price minus the value of the call. C) the call premium. D) the stock price. E) none of the above.

C) the call premium.

11. One of the problems with attempting to forecast stock market values is that A) there are no variables that seem to predict market return. B) the earnings multiplier approach can only be used at the firm level. C) the level of uncertainty surrounding the forecast will always be quite high. D) dividend payout ratios are highly variable. E) none of the above.

C) the level of uncertainty surrounding the forecast will always be quite high.

12. A company paid a dividend last year of $1.75. The expected ROE for next year is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should be A) $1.80 B) $2.12 C) $1.77 D) $1.94 E) none of the above

D) $1.94

Malkiel, in "Random Walk .." discusses the Roth IRA. In the Roth IRA. A) Taxes are deferred until withdrawn at retirement B) Withdrawals after retirement are tax free. C) You are taxed "up front." D) B and C E) A and B

D) B and C

2. Malkiel argues that stock returns were very low during the 70's because A) Inflation had caused corporate earnings to drop B) OPEC and oil shocks C) Tight monetary policy by the Fed D) Low P/E ratios because of increased perception of risk E) none of the above

D) Low P/E ratios because of increased perception of risk

32. Suppose that you purchased a call option on the S&P 100 index. The option has an exercise price of 680 and the index is now at 720. What will happen when you exercise the option? A) You will have to pay $680. B) You will receive $720. C) You will receive $680. D) You will receive $4,000. E) You will have to pay $4,000.

D) You will receive $4,000.

39. Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange. A) are not; are B) are; are C) are not; are not D) are; are not E) are; may or may not be

D) are; are not

5. The "normal" range of price-earnings ratios for the S&P500 Index is A) between 2 and 10. B) between 5 and 15. C) less than 8. D) between 10 and 20 E) greater than 20.

D) between 10 and 20

29. 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 above.

D) the expected rate of return on the stock.

26. A covered call position is A) the simultaneous purchase of the call and the underlying asset. B) the purchase of a share of stock with a simultaneous sale of a put on that stock. C) the short sale of a share of stock with a simultaneous sale of a call on that stock. D) the purchase of a share of stock with a simultaneous sale of a call on that stock. E) the simultaneous purchase of a call and sale of a put on the same stock.

D) the purchase of a share of stock with a simultaneous sale of a call on that stock.

35. 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. E) none of the above.

D) the variance of returns of the underlying asset return.

17. The price that the buyer of a call option pays for the underlying asset if she executes her option is called the A) strike price. B) exercise price. C) execution price. D) A or C. E) A or B.

E) A or B.

18. An American call option allows the buyer to A) sell the underlying asset at the exercise price on or before the expiration date. B) buy the underlying asset at the exercise price on or before the expiration date. C) sell the option in the open market prior to expiration. D) A and C. E) B and C.

E) B and C.

30. Protective puts offer an advantage over stop-loss orders in that A) the stop-loss order will be executed as soon as the stock price reaches the trigger point, without allowing for a subsequent rebound, while the put allows the holder to wait. B) the stop-loss order is costless to place. C) the stop-loss order may actually be executed at a price below the trigger price. D) both A and B are true. E) both A and C are true.

E) both A and C are true.

16. The price that the buyer of the option pays to acquire the option is called the A) strike price. B) exercise price. C) execution price. D) acquisition price. E) premuim.

E) premuim.

What is the primary disadvantage of adding foreign securities to your portfolio?

Exchange rate risk