FINA 221 Practice Problems Fall 2010 Portfolio Performance Evaluation (Suggested Solution) 1. True or False (a) Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio A has a higher beta than portfolio B
FINA 221 Practice Problems Fall 2010 Options Valuation
1. True or False (a) A call option with an exercise price equal to the underlying asset's price has a premium of zero. (b) The intrinsic value of a call option with X = S0 is equal to zero. (c) All th
FINA 221 Practice Problems Fall 2010 The Efficient Market Hypothesis and Behavioral Finance (Suggested Solution)
1. True or False (a) According to the efficient market hypothesis, if stock prices have gone up in the past they should go down in the future,
FINA 221 Practice Problems Fall 2010 The Efficient Market Hypothesis and Behavioral Finance (Suggested Solution)
1. True or False (a) According to the efficient market hypothesis, if stock prices have gone up in the past they should go down in the future,
FINA 221 Practice Problems Fall 2010 Managing Fixed-Income Portfolios (Suggested Solution)
1. True or False (a) Holding other factors constant, the Macaulay's Duration of a bond is always increasing with the bond's maturity. Solution: False. For deep disc
FINA 221 Practice Problems Fall 2010 Managing Fixed-Income Portfolios
1. True or False (a) Holding other factors constant, the Macaulay's Duration of a bond is always increasing with the bond's maturity. (b) Using Duration and Convexity to approximate bon
FINA 221 Practice Problems Fall 2010 Index Models and APT 1. True or False (Briefly Explain) (a) Over the past year, the realized return on stock A was 12% and on stock B was 10%. The betas of A and B are 0.8 and 1.2, respectively. So the past year's perf
FINA 221 Practice Problems Fall 2010 Index Models and APT 1. True or False (Briefly Explain) (a) Over the past year, the realized return on stock A was 12% and on stock B was 10%. The betas of A and B are 0.8 and 1.2, respectively. So the past year's perf
FINA 221 Practice Problems Fall 2010 Futures Markets (Suggested Solution)
1. True or False
(a) If a trader holding a long position in futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is the clearinghouse.
FINA 221 Practice Problems Fall 2010 Futures Markets
1. True or False
(a) If a trader holding a long position in futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is the clearinghouse. (b) The terms of forw
FINA 221 Practice Problems Fall 2010 Fixed-Income Securities (Suggested Solution)
1. True or False (a) A coupon bond that pays interest semi-annually is selling at par value and has a coupon rate of 5.6%. Without knowing the maturity, the discount rate of
FINA 221 Practice Problems Fall 2010 Fixed-Income Securities
1. True or False (a) A coupon bond that pays interest semi-annually is selling at par value and has a coupon rate of 5.6%. Without knowing the maturity, the discount rate of this bond cannot be
FINA 221 Practice Problems Fall 2010 The Capital Asset Pricing Model (CAPM) 1. True or False (Briefly Explain) (a) If the CAPM holds, the return of a well-diversified portfolio with no diversifiable risk and a = 1 is perfectly correlated (i.e., correlatio
Option Valuation
Chapter 21
Option Values
Intrinsic value - profit that could be made if
the option was immediately exercised.
Call: stock price - exercise price
Put: exercise price - stock price
Time value - the difference between the
option price an
Option
Chapter 20
Introduction
Buy - Long
Sell - Short
Call the right to buy underlying asset at ex. price
Put the right to sell underlying asset at ex. price
Key Elements
The underlying asset
Exercise or Strike Price
Premium or Price
Maturity or Expirati
FINA 221 Practice Problems Fall 2010 Options Markets
1. True or False (a) A call option writer will exercise the option if the spot price at maturity is higher than the strike price. (b) Call options and put options holders have limited loss. (c) The shap
FINA 221 Practice Problems Fall 2010 Options Markets (Suggested Solution)
1. True or False (a) A call option writer will exercise the option if the spot price at maturity is higher than the strike price. Solution: False. The option to exercise is with the
FINA 221 Practice Problems Fall 2010 The Capital Asset Pricing Model (CAPM) 1. True or False (Briefly Explain) (a) If the CAPM holds, the return of a well-diversified portfolio with no diversifiable risk and a = 1 is perfectly correlated (i.e., correlatio
FINA 221 Practice Problems Fall 2010 Trading Securities (Suggested Solution) 1. True or False (Briefly Explain) (a) You short sell 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is $4,500. (Suppose the maintenance m
FINA 221 Practice Problems Fall 2010 Trading Securities 1. True or False (Briefly Explain) (a) You short sell 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is $4,500. (Suppose the maintenance margin is 0% and you n
FINA 221 Practice Problems Fall 2010 The Term Structure of Interest Rates (Suggested Solution)
1. True or False (a) According to the expectations hypothesis, a rising yield curve implies that interest rates are expected to increase in the future. Solution
FINA 221 Practice Problems Fall 2010 The Term Structure of Interest Rates
1. True or False (a) According to the expectations hypothesis, a rising yield curve implies that interest rates are expected to increase in the future. (b) The term structure of int
FINA 221 Practice Problems Fall 2010 Two Determinants of Investment Decisions: Return and Risk (Suggested Solution) 1. True or False (Briefly Explain) (a) A risk-loving investor is willing to accept lower expected returns in exchange for higher risk. Solu
FINA 221 Practice Problems Fall 2010 Two Determinants of Investment Decisions: Return and Risk 1. True or False (Briefly Explain) (a) A risk-loving investor is willing to accept lower expected returns in exchange for higher risk. (b) In deciding which fun
FINA 221 Practice Problems Fall 2010 Portfolio Mathematics and Capital Allocation 1. True or False (Briefly Explain) (a) The utility indifference curves of two different risk-averse investors cannot intersect. Solution: FALSE. Different risk-averse invest
FINA 221 Practice Problems Fall 2010 Portfolio Mathematics and Capital Allocation 1. True or False (Briefly Explain) (a) The utility indifference curves of two different risk-averse investors cannot intersect. (b) If you invest y of your wealth in a risky
FINA 221 Practice Problems Fall 2010 Portfolio Analyses and the Markowitz Portfolio Selection Model 1. True or False (Briefly Explain) (a) The efficient frontier includes the set of all possible optimal complete portfolios. The optimal complete portfolio
FINA 221 Practice Problems Fall 2010 Portfolio Analyses and the Markowitz Portfolio Selection Model 1. True or False (Briefly Explain) (a) The efficient frontier includes the set of all possible optimal complete portfolios. The optimal complete portfolio
FINA 221 Practice Problems Fall 2010 Portfolio Performance Evaluation 1. True or False (a) Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sh
FINA 221 Practice Problems Fall 2010 Options Valuation (Suggested Solution)
1. True or False (a) A call option with an exercise price equal to the underlying asset's price has a premium of zero. Solution: False. The intrinsic value of the call option is z