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