investments final exam

1. 40, 90: The U.S. carries about __% of the world's economy, butdomestic investors put in about __% of their money into the U.S.economy.

2. A: An American put option can be exerciseda. any time on or before the expiration dateb. only on the expiration datec. any time in the indefinite futured. only after dividends are paide. none of the above

3. A: If the stock price increases, the price of a put option on thatstock ________ and that of a call option ________a. decreases; increasesb. decreases; decreasesc. increases; decreasesd. increases; increasese. does not change; does not change

4. A: A protective put strategy is a. a long put plus a long position in the underlying assetb. a long put plus a long call on the same underlying assetc. a long call plus a short put on the same underlying assetd. a long put plus a short call on the same underlying assete. none of the above

5. A: ________ is equal to (common shareholder's equity /common shares outstanding)a. Book value per shareb. Liquidation value per sharec. Market value per shared. Tobin's Qe. none of the above

6. A: Recent empirical research indicates __________.a. that real rates of return on stocks are positively correlated withinflationb. that real rates of return on stocks are uncorrelated withinflationc. that real rates of return on stocks are negatively correlated withinflationd. the rail of the real rate of return on stocks to inflation is 1.0e. nothing about real rates of return on stocks

7. A: High P/E ratios tend to indicter that a company will _______,ceteris paribusa. grow quicklyb. grow at the same speed as the average companyc. grow slowlyd. not growe. none of the above

8. B: Consider a one year maturity call option and a one year putoption on the same stock both with striking price $100. If therisk 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. $17.50b. $15.26c. $10.36d. $12.26e. none of the above

9. B: If the currency of your country is depreciating, the result shouldbe to _______ exports and to _______ importsa. stimulate; stimulateb. stimulate; discouragec. discourage; stimulated. discourage; discouragee. not affect; not affect

10. B: According to the put-call parity theorem, the value of aEuropean put option on a non-dividend paying stock is equal to:a. the call value plus the present value of the exercise price plusthe stock price b. the call value plus the present value of the exercise price minusthe stock pricec. the present value of the stock price minus the exercise priceminus the call priced. the present value of the stock price plus the exercise priceminus the call pricee. none of the above

11. B: The Option Clearing House Corporation is owned bya. the Federal Reserve Systemb. the exchanges on which stock options are tradedc. the major U.S. banksd. the Federal Deposit Insurance Corporatione. none of the above

12. B: Investors want high plowback ratios a. for all firmsb. whenever ROE > kc. whenever k > ROEd. only when they are in low tax bracketse. whenever bank interest rates are high

13. B: A put option on a stock is said to be out of the money ifa. the exercise price is higher than the stock priceb. the exercise price is less than the stock pricec. the exercise price is equal to the stock priced. the price of the put is higher than the price of the calle. the price of the call is higher than the price of the put

14. B: _______ are analysts who use information concerningcurrent and prospective profitability of a firm to assess the firm'sfair market valuea. Credit analystsb. Fundamental analystsc. Systems analystsd. Technical analystse. Specialists

15. B: Before expiration, the time value of an in the money stockoption is alwaysa. equal to zerob. positivec. negatived. equal to the stock price minus the exercise pricee. none of the above

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16. B: A futures contracta. is an agreement to buy or sell a specified amount of an asset atthe spot price on the expiration date of the contractb. is an agreement to buy or sell and specified amount of an assetat a predetermined price on the expiration date of the contractc. gives the buyer the right, but not the obligation, to buy an assetsome time in the futured. is a contract to be signed in the future by the buyer and theseller of the commoditye. none of the above

17. B: A European call option can be exerciseda. any time in the futureb. only on the expiration datec. if the price of the underlying asset declines below the exercisepriced. immediately after dividends are paide. none of the above

18. C: Buyers of call options _______ required to post margindeposits and sellers of put options ________ required to postmargin deposits a. are; are notb. are; arec. are not; ared. are not; are note. are always; are sometimes

19. C: Which Excel formula is used to execute the Black-Scholesoption pricing model?a. NORMALb. ABNORMALc. NORMSDISTd. DISTe. NORMALDIST

20. C: In a futures contract the futures price isa. determined by the buyer and the seller when the delivery of thecommodity takes placeb. determined by the futures exchangec. determined by the buyer and sealer when they initiate thecontractd. determined independently by the provider of the underlyingassete. none of the above

21. C: The terms of futures contracts _________ standardized, andthe terms of forward contracts _________ standardizeda. are; areb. are not; arec. are; are notd. are not; are note. are; may or may not be

22. C: The maximum loss a buyer of a stock call option can suffer isequal to a. the striking price minus the stock priceb. the stock price minus the value of the callc. the call premiumd. the stock pricee. none of the above

23. C: All else equal, call option values are lowera. in the month of Mayb. for low dividend payout policiesc. for high dividend payout policiesd. A and Be. A and C

24. C: Construction Machinery Company has an expected ROE of11%. The dividend growth rate will be ______ if the firm followsa 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

25. C: Low P/E ratios tend to indicate that a company will _______,ceteris paribusa. grow quicklyb. grow at the same speed as the average companyc. grow slowlyd. P/E ratios are unrelated to growthe. none of the above

26. C: Some successful principles for stock picking according toMalkiel are:a. Don't ignore the trendb. Buy stock valuesc. Trade as little as possibled. A and Be. A and C

27. C: 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 comingyear. The intrinsic value of Dominion Oil stock should be a. $28.12b. $35.55c. $60.00d. $72.00e. none of the above

28. C: One of the problems with attempting to forecast stock marketvalues is that a. there are no variables that sen to predict market returnb. the earnings multiplier approach can only be used at the firmlevelc. the level of uncertainty surrounding the forecast will always bequite highd. dividend payout ratios are highly variable e. none of the above

29. D: All the inputs in the Black-Scholes Option Pricing Model aredirectly observable EXCEPTa. the price of the underlying securityb. the risk free rate of interestc. the time to expirationd. the variance of returns of the underlying asset returne. none of the above

30. D: The "normal" range of price-earnings ratios for the S&P500Index is a. between 2 and 10b. between 5 and 15c. less than 8d. between 10 and 20e. greater than 20

31. D: Malkiel argues that stock returns were very low during the70's because a. Inflation had caused corporate earnings to dropb. OPEC and oil shocksc. Tight monetary policy by the Fedd. Low P/E ratios because of increased perception of riske. None of the above

32. D: Futures contracts ________ traded on an organizedexchange, and forward contrast are _________ traded on anorganized exchangea. are not; areb. are; arec. are not; are notd. are; are note. are; may or may not be

33. D: A company paid a dividend last year of $1.75. The expectedROE for next year is 14.5%. An appropriate required return on thestock is 10%. If the firm has a plowback ratio of 75%, thedividend in the coming year should bea. $1.80b. $2.12c. $1.77d. $1.94e. none of the above

34. D: Suppose you purchased a call option on the S&P 100 index.The option has an exercise price of 680 and the index is now at720. What will happen when you exercise the option?a. You will have to pay $680b. You will receive $720c. You will receive $680d. You will receive $4000e. You will have to pay $4000

35. D: All of the following factors affect the price of a stock optionEXCEPTa. the risk-free rateb. the riskiness of the stockc. the time to expirationd. the expected rate of return on the stocke. none of the above

36. D: A covered call position is a. the simultaneous purchase of the call and the underlying assetb. the purchase of a share of stock with a simultaneous sale of aput on that stock c. the short sale of a share of stock with a simultaneous sale of acall on that stockd. the purchase of a share of stock with a simultaneous sale of acall on that stock e. the simultaneous purchase of a call and sale of a put on thesame stock

37. D: Malkiel, in "Random Walk," discusses the Roth IRA. In theRoth IRA:a. Taxes are deferred until withdrawn at retirementb. Withdrawals after retirement are tax freec. You are taxed "upfront"d. B and Ce. A and B

38. E: An American call option allows the buyer to a. sell the underlying asset at the exercise price on or before theexpiration dateb. buy the underlying asset at the exercise price on or before theexpiration datec. sell the option in the open market prior to expirationd. A and Ce. B and C

39. E: The price that the buyer of the option pays to acquire theoption is called the a. strike priceb. exercise pricec. execution priced. acquisition pricee. premium

40. E: Protective puts offer an advantage over stop-loss orders in that a. the stop-loss order will be executed as soon as the stock pricereaches the trigger point, without allowing for a subsequentrebound, while the put allows the holder to waitb. the stop-loss order is costless to placec. the stop-loss order may actually be executed at a price belowthe trigger price d. both A and B are truee. both A and C are true

41. E: The price that the buyer of a call option pays for the underlyingasset if she executes her option is called the a. strike priceb. exercise pricec. execution priced. A or Ce. A or B