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 retu
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
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
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
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 w
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 maturi
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
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
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 p
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
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
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
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 r
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
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
Exercis
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
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 pri
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 r
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 maxi
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
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
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 t
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 l
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
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 i
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 i
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 optim
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 optim
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
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. Solut