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Advanced Finance (Subject) / Test Training (Lesson)
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- You buy a share of stock, write a 1-year call option with X = $75, and buy a 1-year put option with X = $75. Your net outlay to establish the entire portfolio is $73.8. The stock pays no dividends. What is the risk-free interest rate? (X/Net outlay -1) * 100
- The current market price of a share of a stock is $80. If a put option on this stock has a strike price of $75, the put is out of the money and sells for a lower price than if the market price of the stock is $75. True
- Currency-translated options have either asset or exercise prices denoted in a foreign currency.
- The potential loss for a writer of a naked call option on a stock is unlimited True
- Call options on IBM listed stock options are created by investors and traded on various exchanges. True
- Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. Buyers of call options __are not________ required to post margin deposits and sellers of put options ____are______ required to post margin deposits.
- Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________. Buyers of put options anticipate the value of the underlying asset will __decrease________ and sellers of call options anticipate the value of the underlying asset will ______decrease__.
- Covered Call the purchase of a share of stock with a simultaneous sale of a call on that stock.
- Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share will raise about 206
- Money spread You purchased one AT&T March 50 call and sold one AT&T March 55 call.
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- A Time Spread You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as a time spread
- Before expiration, the time value of a call option is equal to the actual call price minus the intrinsic value of the call.
- All of the following factors affect the price of a stock option except the expected rate of return on a stock
- The value of a stock put option is positively related to the following factors except the Stock price
- You purchase one IBM March 200 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy? 19400
- Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is 300
- Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. What is the lowest stock price at which you can break even? 103
- Long straddle You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3
- You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be 800
- You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to both $52 and $68.
- Some more "traditional" assets have optionlike features; some of these instruments include callable bonds. convertible bonds. warrants.
- As the numbers of securities in a portfolio decrease, what happens to the average portfolio standard deviation it decreases at a decreasing rate
- The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the portfolio opportunity set
- When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio the portfolio standart deviation will be less than the average of the individual security standard deviations
- In a two-security minimum variance portfolio where the correlation between securities is greater that -1.0 the security with the higher standard deviation will be weigted less heavily
- The individual investor's optimal portfolio is designated by the point of tangeny with the indifference curve and the CAL
- The standard deviation of a two-asset portfolio is a linear function of the assets' weights when the assets have a correlation coefficient equal to one
- The separation property refers to the conclusion that the determination of the best risky portfolio is objective and the choice of the best complete portfolio is subjective.
- CML is the CAL provided by a 1-month T-Bill rate and a broad index of common stocks like the Index portfolio NASDAQ SP500 Equation: Slope = E(rIndex -rf) / ∂Index E(ri) = Sharpe ratio * ∂Index + rf
- CAL straight line that depicts all of the risk-return combinations that are able to investors who invest in a risky portfolio and a risk-free asset or borrowsto invest in risky assets 1. Lending: the y-intercept of the CAL is equal to the risk-free rate the slope for the CAL for an investor who is lending is the Sharpe Ratio ri-rf 2. Borrowing: the y-intercept of the CAL is equal to the borrowing rate the slope for the CAL for an investor who is borrowing is the Sharpe Ratio ri-rb
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- A Collar A collar combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put
- a callable bond should be priced as a straight bond plus a call option.
- Asian options their payoff is based on the average price of the underlying asset.
- Trading in "exotic options" takes place primarily in the over-the-counter market.
- You purchased a call option for $3.45 17 days ago. The call has a strike price of $45 and the stock is now trading for $51. If you exercise the call today, what will be your holding period return? If you do not exercise the call today and it expires, what will be your holding period return? 73.9%, -100%
- What happens to an option if the underlying stock has a 2-for-1 split? The exercise price would become one-half of what it was and the number of options held would double.
- In terms of the risk/return relationship in the APT, only factor risk commands a risk premium in market equilibrium and only systematic risk is related to expected returns.
- Advantage(s) of the APT is(are) that the model does not require a specific benchmark market portfolio.
- An important difference between CAPM and APT is that both CAPM depends on risk-return dominance; APT depends on a no arbitrage condition and CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium.
- A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in risk arbitrage.
- A well diversified portfolio is one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero.
- The APT requires a benchmark portfolio that is well-diversified and lies on the SML.
- Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? II) The expected return-beta relationship is maintained for all well-diversified portfolios.III) The expected return-beta relationship is maintained for all but a small number of individual securities.
- The factor F in the APT model represents the deviation from its expected value of a factor that affects all security returns.
- Which of the following is true about the security market line (SML) derived from the APT? the benchmark portfolio for the SML may be any well-diversified portfolio.
- If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected excess return must be proportional to its beta coefficient.
- Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because they may result from data snooping.
- Advantages of multi-factor models modeling the systematic component of firm returns in greater detail. incorporating firm-specific components into the pricing model. allowing for multiple economic factors to have differential effects.