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10) Rank the following taxable bonds from lowest yielding to highest
yielding.
I.
U.S. Treasury bonds
II. corporate bonds
III. agency bonds
A) I, II, III
B) II, I, III
C) III, II, I
D) I, III, II
Answer: D
2) A yield curve depicts the term structure of interest rates for similarrisk securities.
Answer: TRUE
11) Which of the following factors will tend to cause the risk free rate to
rise?
I.
an increase in the money supply
II. an increase in the federal budget deficit
III. an increase in the level of economic activity
IV. falling rates in foreign markets
A) I, II, III only
B) II, III only
C) I and IV
D) I, II, III and IV
Answer: B
Answer: TRUE
10) A down-sloping yield curve indicates that interest rates are about to
rise.
Answer: FALSE
11) A steep yield curve is generally considered a bullish sign for bonds.
Answer: TRUE
12) The yield curve depicts the relationship between a bond's yield to
maturity and its
A) duration.
B) term to call.
C) term to maturity.
D) volatility.
Answer: C
26) Evidence indicates that the theory of interest rates with the most
predictive power is
A) market segmentation theory.
B) expectations theory.
C) liquidity preference theory.
D) a combination of expectations, market expectations and liquidity
preference.
Answer: D
19) When compared to the yield curve for Treasury securities, the yield
curve for corporate securities should
A) slope in the opposite direction.
B) be similar in shape but higher.
C) be similar in shape but lower.
D) be nearly identical.
Answer: B
10) Hedge funds are subject to the same regulations and disclosure
requirements as mutual funds.
Answer: FALSE
11) Most exchange-traded funds are index funds.
Answer: TRUE
12) Investors who buy or sell exchange-traded funds will do so at a
price based on the closing price for the day.
Answer: FALSE
13) Mutual fund fees are disclosed in the fund prospectus.
Answer: TRUE
14) The net asset value is the price per share an investor will pay to
acquire shares in a no-load, open-end fund.
Answer: TRUE
15) The longer you intend to hold a fund, the more willing you should
be to accept a front-end load charge in exchange for lower annual
management and 12(b)-1 fees.
Answer: TRUE
16) An open-end investment company
A) is involved in all trades of its shares.
B) sells shares at a discounted NAV price.
C) trades like a stock on the exchanges.
D) has a set number of shares.
Answer: A
17) The net asset value of a mutual fund increased from $12.03 to
$13.53, but its price per share increased by only $1.26. This
information indicates that the fund
A) paid out $1 in capital gains.
B) paid out $1 in dividends.
C) is a closed-end fund.
D) is an open-end fund.
Answer: C
D) The ETF based on the Dow is priced at 1/10 of the value of the
DJIA.
Answer: B
22) Which of the following statements is(are) correct concerning
exchange-traded funds (ETFs)?
I.
You can buy and sell ETFs any time during trading hours.
II. ETFs are actively managed.
III. ETFs have high portfolio turnover rates.
IV. ETFs rarely distribute any capital gains.
A) I, II and IV only
B) I and IV only
C) II and III only
D) I, III and IV only
Answer: B
23) The commission charged when shares of an open-end mutual fund
are purchased is called a
A) management fee.
B) back-end load.
C) front-end load.
D) 12(b)-1 fee.
Answer: C
24) Back-end loads
A) are charged when an investor buys their mutual fund shares.
B) are charged if an investor sells his or her shares within the first few
years.
C) were designed to help no-load funds cover their marketing
expenses.
D) encourage short-term trading.
Answer: B
25) One characteristic of 12(b)-1 charges is that they are payable
A) only in years that the mutual fund shows an increase in net asset
value.
B) each year regardless of the performance of the mutual fund.
C) only during the first year the fund is owned.
D) only when shares in the fund are sold.
Answer: B
26) Two mutual funds are quoted as follows.
funds?
I.
They are highly regulated.
II. They hedge all positions to limit risks.
III. Management and other fees are extremely low compared to other
types of funds.
IV. Access is limited to institutions and high net worth or high income
individuals.
A) I, II and III only
B) II and IV only
C) IV only
D) I, II, III and, IV
Answer: C
31) Investors in hedge funds have the legal status of
A) shareholders.
B) limited partners.
C) general partners.
D) trustees.
Answer: B
12.3 Learning Goal 3
1) The primary objective of growth mutual funds is capital appreciation
with a high level of current income.
Answer: FALSE
2) Morningstar, a leading. mutual fund industry publication, classifies
funds by the number of shareholders and the total amount of money
invested in the fund.
Answer: FALSE
3) Index funds merely attempt to match the performance of some
benchmark, not to outperform it.
Answer: TRUE
4) The maximum average maturity of the holdings within a money
market account must be 6 months or less.
Answer: FALSE
5) Socially responsible funds only hold stocks of companies that meet
the fund's ethical guidelines.
Answer: TRUE
6) A unit investment trust
A) engages in short-term trading within a particular sector.
B) offers a low-cost, diversified portfolio.
C) is an unmanaged portfolio of securities.
D) is used only for fixed-income securities.
Answer: C
7) Risk-seeking investors seeking maximum capital appreciation with
little, if any current income, should invest in
A) value funds.
B) growth funds.
C) aggressive growth funds.
D) equity-income funds.
Answer: C
8) An aggressive growth mutual fund is least likely to purchase a stock
A) with a high P/E ratio.
B) with a high anticipated rate of growth.
C) of an unseasoned firm.
D) with a high dividend yield.
Answer: D
29) Performance fees based on profits earned by the fund are typical
of
A) hedge funds.
B) exchange traded funds.
C) closed-end investment companies.
D) open end mutual funds.
Answer: A
I.
with low dividend yields.
II.
with potential for growth.
III. with low P/E ratios.
IV. of newly discovered firms.
A) I and III only
B) II and III only
C) II, III and IV only
D) I, II, III and IV
Answer: B
11) The primary objective of an equity-income fund is
A) capital gains.
B) current income with capital preservation.
C) potentially high capital gains with limited income.
D) high risk-return trade-offs.
Answer: B
12) Which type of mutual fund consists of both stocks and bonds with a
combined objective of current income and long-term capital gains?
A) equity-income
B) balanced
C) value
D) bond
Answer: B
13) One characteristic of bond funds is the
A) requirement of a minimum initial investment of $5,000 or more.
B) high anticipated short-term growth potential.
C) fluctuation in value in response to changing interest rates.
D) extremely aggressive trading approach.
Answer: C
14) One advantage gained by investing in a bond fund rather than in
individual bonds is the
A) diversification among issuers.
B) most bond funds outperform their benchmarks.
C) immunity from interest rate changes.
D) guarantee that the bonds will be held to maturity to avoid market
fluctuations.
Answer: A
15) Which of the following are advantages of bond funds over
individual bonds?
I.
greater liquidity
II. maturities matched to the investor's time horizon
III. automatic reinvestment of interest payments
IV. diversification
A) I and III only
B) I, III and IV only
C) I, II and IV only
D) II, III and IV only
Answer: B
16) Investors who seek triple (federal, state, and local) tax-free income
should invest in ________ bond funds.
A) convertible
B) indexed
C) mortgage-backed
D) single-state municipal
Answer: D
17) Compared to yields on general purpose money funds, the yields on
tax-exempt money funds are
A) about the same.
B) 5 to 10 percent higher.
C) 5 to 10 percent lower.
D) 20 to 30 percent lower.
Answer: D
18) Government securities money funds are structured to eliminate
A) interest rate risk.
B) inflation risk.
C) default risk.
D) market risk.
Answer: C
19) A fund that is designed to match the performance of a measure
4) Funds that consistently earn above average rates of return also tend
to charge higher sales commissions.
Answer: FALSE
5) Mutual funds and exchanged traded funds are available to meet the
goals of both aggressive and conservative investors.
Answer: TRUE
Answer: A
A) 10.5%
B) 10.8%
C) 25.6%
D) 32.3%
Answer: A
18) Mutual fund investors are primarily exposed to ________ and
________ risks.
A) market; financial
B) market; inflation
C) business; financial
D) business; inflation
Answer: B
10) The holding period return for mutual funds should be based on
A) net asset value exclusively.
B) dividend income exclusively
C) capital gains distributions exclusively
D) capital gains distributions and dividends.
Answer: D
20) An investor in the 25% marginal tax bracket purchased a bond for
$983, received $85 in interest, and then sold the bond for $955 after
holding it for six months. The tax rate for capital gains with holding
periods in excess of one year is 15%. What are the pre-tax and posttax holding period returns?
A) 5.8%; 4.3%
B) 6.0%; 4.5%
C) 5.8%; 4.5%
D) 6.0%; 4.3%
Answer: A
15) Six months ago, Suzanne purchased a stock for $28 a share.
Today she sold the stock at a price of $32 a share. During the time she
owned the stock, she received a total of $1.30 in dividends per share.
What is her holding period return?
A) 16.6%
B) 18.9%
C) 33.2%
D) 37.8%
Answer: B
16) Ten months ago, Junior purchased a stock for $14 a share. The
stock pays a quarterly dividend of $0.50 per share. Today, Junior sold
the stock for $15 a share. What is his holding period return?
A) 10.0%
B) 10.7%
C) 16.7%
D) 17.9%
Answer: D
17) Ten years ago, Taylor purchased 444.44 shares in a mutual fund
for $22.50 per share. He has never made an additional investment in
this fund, but because of reinvested dividends and capital gains, he
now owns 1,200 shares with a net asset value of $25.88 per share.
Ignoring taxes, his compound average annual rate of return (IRR) is
A) 10.0%.
B) 12%.
C) 21%.
D) 31%.
Answer: B
18) Tim purchased a stock ten months ago for $14 a share, received a
$1 dividend per share last month, and sold the stock today for $16 per
share. Tim has a marginal tax rate of 30%. Both capital gains for
securities held more than one year and dividend income is taxed at
15%. What is Tim's after-tax holding period return?
A) 14.1%
B) 15.9%
C) 16.1%
D) 18.2%
Answer: C
19) On February 19, 2004, Angela purchased 100 shares of ABC stock
at a total cost of $1,712.50. She received a total of $125.00 in
dividends and sold the stock today, February 22, 2005. Her net
proceeds from the sale are $1,892.40. Angela has a combined state
and federal marginal tax rate of 32%. Her combined state and federal
tax rate on both her capital gains in excess of one year and her
dividend income is 18%. What is Angela's after-tax holding period
return on her investment in ABC stock?
A) 11.0%
B) 12.1%
C) 13.2%
D) 14.6%
Answer: D
22) Maria purchased $5,000 of no-load mutual fund shares just over a
year ago. She received $136 in dividend income and $201 in long-term
capital gains distributions. Today she sold her shares for $5,062. Maria
is in the 25% marginal tax bracket. Capital gains with holding periods
in excess of one year and dividend income are taxed at 15%. What is
Maria's after-tax holding period return?
A) 6.0%
B) 6.6%
C) 6.8%
D) 8.0%
Answer: C
23) On January 1, Tim's portfolio was valued at $432,098. During the
year Tim received $10,563 in interest and $15,060 in dividends. He
also sold stock at a net loss of $12,870 and used the proceeds to
purchase another stock. Tim did not contribute any more funds nor
withdraw any funds during the year. On December 31 of the same
year, Tim's portfolio was valued at $398,189. What is the holding
period return for the year?
A) -5.3%
B) -4.9%
C) -2.1%
D) -1.9%
Answer: D
13.4 Learning Goal 4
1) Sharpe's measure of portfolio performance adjusts for risk by
dividing total portfolio return by the portfolio beta.
Answer: FALSE
2) Sharpe's measure of portfolio performance compares the risk
premium on a portfolio to the portfolio's standard deviation of return.
Answer: TRUE
3) Sharpe's measure is a measure of the risk premium per unit of total
risk.
Answer: TRUE
4) Jensen's measure of portfolio performance compares the risk
premium on a portfolio to the portfolio's beta.
Answer: FALSE
5) Sharpe's measure, Treynor's measure, and Jensen's measure all
focus on non-diversifiable risk.
Answer: FALSE
6) Sharpe measures total risk while Treynor and Jensen measure only
systematic risk.
Answer: TRUE
7) A Jensen measure of 2.5% means that a security earned 2.5% more
than the overall market.
Answer: FALSE
8) Portfolio revision is the ongoing process of systematically studying
the issues in the portfolio and selling certain issues and purchasing
others as the means of maintaining a portfolio that best meets the
investor's objectives.
Answer: TRUE
9) Which of the following are reasons to consider selling an investment
that is currently in a portfolio?
I.
The investment has met the original objective.
II. Better investment opportunities currently exist.
III. The outlook for the investment has improved.
IV. The investment has not met expectations and no change is
expected.
A) I, II and IV only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV
Answer: A
10) A problem investment
A) requires immediate attention.
B) is one you would buy if you did not already own it.
C) is defined as any investment with unrealized losses.
D) should be left alone and given time to correct itself.
Answer: A
11) Allison's portfolio has an expected return of 14% and a standard
deviation of of 20%. Brianna's portfolio has an expected rate of return
of 11% and a standard deviation of 12%. The risk-free rate is 3%.
According to the Sharpe measure,
A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) The portfolio's are equally desirable.
D) The answer depends on Allison and Brianna's risk tolerance.
Answer: B
12) Ella owns a stock with a beta of 1.34 and a standard deviation of
16.4%. The stock has a total return of 14.8%. The market risk premium
is 8.5%, while the return on the market portfolio was 12.0%. What is
the value of Sharpe's measure for Ella's portfolio?
A) 0.21
B) 0.38
C) 0.69
D) 0.90
Answer: C
13) Sharpe's measure of portfolio performance compares the risk
premium on a portfolio to
A) a broad-based market index such as the S&P 500 index.
B) the portfolio's standard deviation of return.
C) the portfolio's beta.
D) the prevailing risk-free rate of return.
Answer: B
14) The Sharpe's measure for Jane Smith's investment portfolio is
0.40, while the Sharpe's measure for the market is 0.30. This
information suggests that Smith's portfolio
A) exhibits superior performance because its risk premium per unit of
risk is above that of the market.
B) exhibits poor performance because its risk premium per unit of risk
is below that of the market.
C) is inadequately diversified, and more securities should be added to
the portfolio in order to bring it in line with the market.
D) is overly diversified, and some securities should be sold to bring the
portfolio in line with the market.
Answer: A
15) Phil has a portfolio with a 13.2% total return. The beta of the
portfolio is 1.48 and the standard deviation is 13%. Currently, the riskfree rate of return is 4% and the overall market has a total return of
11%. What is the value of Treynor's measure for Phil's portfolio?
A) 2.1%
B) 6.2%
C) 7.1%
D) 8.9%
Answer: B
16) Allison's portfolio has an expected return of 14% and a beta of
1.37. Brianna's portfolio has an expected rate of return of 11% and a
beta of 1. The risk-free rate is 3%. According to the Treynor measure,
high.
C) to equal the performance of market averages at the lowest dollar
cost.
D) to sell as markets decline and buy as they begin to rise.
Answer: B
12) When using a constant dollar plan,
A) gains from the speculative portion of the portfolio are transferred to
the safe portion of the portfolio.
B) the amount of money in the speculative portion of the portfolio
should decline over time.
C) the percentage of funds in the speculative portion of the portfolio
should increase over time.
D) the ratio of safe funds to speculative funds remains constant over
time.
Answer: A
Answer: C
4) Puts and calls are issued by the same corporation that issued the
underlying stock.
Answer: FALSE
5) The owner a put is obliged to sell the underlying security at the
strike price on the date of expiration.
Answer: FALSE
6) Rights are call options issued to current owners of the stock and
normally expire within a short period of time.
Answer: TRUE
7) Options allow investors to speculate on price movements without a
large initial investment.
Answer: TRUE
8) Warrants are short-term options usually expiring within a year or
less.
Answer: FALSE
9) Warrants are options that are attached to bond issues to make the
bonds more attractive to investors.
Answer: TRUE
10) Rights and warrants are the riskiest types of options.
Answer: FALSE
11) Purchasers of stock options
A) own a financial asset with benefits of firm ownership.
B) have a claim on the profits of the firm issuing the underlying
securities.
C) have the obligation to buy or sell a predetermined amount of shares
at the strike price.
D) have the right to buy or sell a certain number of underlying shares.
Answer: D
12) Which one of the following statements concerning options is
correct?
A) One option covers 1,000 shares of stock.
B) A put gives the option holder the right to buy a stated amount of
securities.
C) The owner of a call is entitled to the dividends paid on the
underlying shares of stock.
D) Option holders can profit on movements of the price of the
underlying security.
Answer: D
13) An American call option gives the owner
A) the right to buy or sell the stock at the strike price on or before the
expiration date.
B) the right but not the obligation to buy the stock at the strike price on
or before the expiration date.
C) the right and the obligation to buy the stock at the strike price on or
before the expiration date.
D) the right but not the obligation to sell the stock at the strike price on
or before the expiration date.
Answer: B
14) Which of the following statements concerning options are correct?
I.
Options are derivative securities.
II. The value of an option is dependent upon the value of the
underlying security.
III. The seller of the option retains the option premium whether or not
the option is exercised.
IV. Options can provide leverage benefits.
A) II and III only
B) I, II and III only
C) I, II and IV only
D) I, II, III and IV
Answer: D
15) Which of the following is true about rights?
A) They are usually attached to bonds as a "sweetener."
B) The owner has several years in which to exercise the option.
C) They are a type of short-lived call option.
D) They are a type of short-lived put option.
B) $480
C) $500
D) $600
Answer: A
10) Rex bought a put on Alpha stock with a strike price of $35 when
the market price of Alpha stock was $33 a share. Alpha is currently
selling at $34 a share. Which of the following statements are true given
this information?
I.
Rex's option is worth at least $100 today.
II. Rex's option is worthless today.
III. Rex's option has more value today than when he bought it.
IV. Rex's option has less value today than when he bought it.
A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
Answer: B
11) One of the major disadvantages of options is
A) their lifespan.
B) their cost.
C) their lack of liquidity.
D) the risk to option buyers.
Answer: A
12) The most important factor affecting the market price of a put or call
is the
A) market interest rate.
B) expiration date.
C) price behavior of the underlying common stock.
D) price behavior of the corresponding warrant.
Answer: C
13) NZMA stock is currently selling for $128. Which of the following
options is "in-the-money"?
A) March 130 call
B) February 125 call
C) March 125 put
D) February 100 put
Answer: B
14) Which of the following affect the value of puts and calls written on
shares of common stock?
I.
price volatility of the underlying stock
II. current market price of the underlying stock
III. length of time until the option expiration date
IV. current market interest rate
A) I and II only
B) I, II and III only
C) II, III and IV only
D) I, II, III and IV
Answer: D
15) Lew paid $300 to purchase a call on Delta stock with a strike price
of $25. What does the market price of Delta have to be for Lew to
break-even on his option investment? Ignore transaction costs and
taxes.
A) $22
B) $25
C) $28
D) cannot be determined from the information provided
Answer: C
16) Andrea wrote a three-month call on Echo stock. The option cost
$200 and the strike price was $10. What does the market price of Echo
have to be for Andrea to break-even on this investment if the option is
exercised? Ignore transaction construed taxes.
A) $10
B) $12
C) $8
D) cannot be determined from the information provided
Answer: B
17) Jason purchased a six-month put on ABC stock at a cost of $100.
The strike price was $15. At what market price does Jason just breakeven on this investment? Ignore transaction costs and taxes.
A) $15
B) $16
C) $14
D) cannot be determined from the information provided
Answer: C
18) Jamie wrote a nine-month put on Beta stock. The strike price was
$25 and the market price at the time the option was written was $24.
The total price of the option contract was $150. At what market price
will Jamie just break-even on this investment? Ignore transaction costs
and taxes.
A) $23.50
B) $24.00
C) $25.00
D) $26.50
Answer: A
19) A put has fundamental value as long as
A) the market price of the underlying financial asset has a positive
value.
B) the market price of the underlying financial asset is less than the
strike price.
C) the strike price of the put is greater than the time premium of the
put.
D) the strike price of the put is less than the market value of the
underlying asset.
Answer: B
20) What is the fundamental value of a call with a strike price of $30
and a market price of $33?
A) -$300
B) -$3
C) $3
D) $300
Answer: D
21) Which of the following represent in-the-money options?
I.
a call when the market price exceeds the strike price
II. a call when the strike price exceeds the market price
III. a put when the market price exceeds the strike price
IV. a put when the strike price exceeds the market price
A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
Answer: B
22) What is the time premium of a put with a strike price of $25 when
the option price is $2 and the underlying common stock sells for $24?
A) $100
B) $200
C) $300
D) $400
Answer: A
23) What is the fundamental value of a put contract with a strike price
of $25 when the option price is $1.50 and the underlying common
stock sells for $26?
A) $150
B) $100
C) $0.00
D) -$100
Answer: C
24) Nowel Inc. stock is currently priced at $42. The present value of
the strike price of a call option on this stock is $44. Probability one, as
calculated by the Black Scholes option pricing model is .6541;
probability 2 is .3722. The value of this option as calculated by BlackScholes is
A) $(2.00).
B) $11.10.
C) $2.000.
D) $10.71.
Answer: B
25) Which of the following increase(s) the time premium of a call
option?
I.
a market price that exceeds the strike price
B) write a put
C) buy a put
D) sell a put
Answer: C
14) Roselle paid $250 to buy one put option with a strike price of $35.
What is the maximum profit Roselle can earn on her option contract?
A) $100
B) $350
C) $3,250
D) Her profit potential is unlimited.
Answer: C
15) The price of ABC stock is currently $42 per share, but in six
months you expect it to rise to $50. ABC does not pay a dividend. You
buy a six-month call on ABC, with a strike price of $45. The option cost
$200. What holding period return do you expect on this call? Ignore
transaction costs and taxes.
A) 150%
B) 200%
C) 250%
D) 300%
Answer: A
16) Tiffany would like to own shares of Blackwood, Inc. but only if she
can acquire them at a total cost of $30 a share or less. Blackwood is
currently trading at $31.76. Cynthia should ________ with a strike
price of $30. Ignore transaction costs.
A) buy a call
B) buy a put
C) write a call
D) write a put
Answer: A
17) Fred bought 600 shares of Edgewood stock at a price of $19. The
stock is currently selling for $53 a share. To protect his profits, Fred
should buy
A) 600 call options with a strike price of $55.
B) 600 put options with a strike price of $50.
C) 6 call options with a strike price of $55.
D) 6 put options with a strike price of $50.
Answer: D
18) Shares of Lakewood, Inc. are currently selling for $52.63. You
believe the stock will decline in price ranging from $30 to $32 in the
next few months. Which of the following strategies will allow you to
profit if your prediction is correct?
I.
short the stock
II. buy a call at 50
III. write a call at 55
IV. buy a put at 45
A) II and IV only
B) I and III only
C) III and IV only
D) I, III and IV only
Answer: D
19) In January, JB stock was selling for $50 per share. When the calls
and the puts with a strike price of $45 expired on March 20, JB was
selling at $46. Which investors made a profit?
I.
the writer of the call
II. the buyer of the call
III. the writer of the put
IV. the buyer of the put
A) II and III
B) I and III
C) only III
D) II and IV
Answer: B
20) In nearly all cases, the purpose of a hedge is to
A) reduce or eliminate risk.
B) make a very high profit in an extremely short time frame.
C) speculate on a downward drop in a general market index.
D) speculate on an upward movement in a given currency.
Answer: A
21) Which one of the following actions would be the most appropriate
Answer: TRUE
3) Writing covered calls protects the writer from losses if the price of
the underlying stock declines.
Answer: FALSE
4) Covered call writers have unlimited loss exposure as well as
unlimited profit potential.
Answer: FALSE
5) Matt owns 500 shares of IKM stock. The market price of IKM is
$51.74. Matt just sold five calls on IKM with a strike price of $50. This
is known as
A) writing a naked call.
B) writing a covered call.
C) creating a naked cover.
D) covering a short position.
Answer: B
6) Justin owns 400 shares of ORNG stock which he bought 10 months
ago at $20 per share and has now risen to $35 per share. He is afraid
the stock price will fall before he has owned it for a full year, but wants
to postpone realizing profits on the stock for several months, when it
will become a long-term rather than short-term gain. He can protect
his profit and avoid the short-term capital gains rate by
A) writing covered calls.
B) writing puts.
C) buying puts.
D) buying calls.
Answer: C
7) Bill owns 200 shares of EG stock. In November, the market price of
EG was $15.45. Bill sold two March 16 calls on EG for $246. Between
November and March, EG stock fluctuated between $14.75 and
$15.85. EG paid a quarterly dividend of $0.40 per share on January
31. Over the November-March period, Bill earned
A) $80.
B) $(176).
C) $336.
D) $256.
Answer: C
8) Mary wrote a 40 call on ABC stock at a price of $275. She does not
own any shares of ABC. Mary has
I.
limited her losses to $275.
II. unlimited loss potential.
III. limited her gains to $275.
IV. unlimited profit potential.
A) I and IV only
B) II and III only
C) I and III only
D) II and IV only
Answer: B
9) The writer of a covered call has taken a(n)
A) conservative investment position with unlimited potential profits.
B) conservative investment position with limited profits.
C) aggressive position with limited losses and unlimited potential
profits.
D) aggressive position with potentially unlimited profits or losses.
Answer: B
14.6 Learning Goal 6
1) While stock index options can be used to play the market as a
whole, they are also effective in protecting equity portfolios against
falling markets.
Answer: TRUE
2) To exercise a call option on the Dow Jones Industrial Average, an
investor would need to actually buy all 30 stocks at the strike price.
Answer: FALSE
3) The value of an interest rate call option increases when interest
rates fall.
Answer: TRUE
4) Put and call index options are available only the S&P 500 Index, the
NASDAQ 100 and the DJIA.
Answer: FALSE
5) Long-term Equity AnticiPation Securities (LEAPS) are a form of
option that gives the holder the right to buy newly issued shares of
stock directly from the issuing corporation.
Answer: FALSE
6) If the S&P 500 index is at 1,461, then the cash value of an S&P 500
index option is
A) $14.61.
B) $1,461.
C) $14,610.
D) $146,100.
Answer: D
7) One could temporarily protect profits on a highly diversified portfolio
of large company stocks by
A) selling S&P 500 Index put options.
B) buying S&P 500 Index put options.
C) buying S&P 500 Index call options.
D) selling S&P 500 Index call options.
Answer: B
8) Bob's DJIA Index option had a strike price of 125. When he
exercised the option, the Dow was at 13,050.
A) Bob received $5,500 from the writer of the contract.
B) Bob paid $550 to the writer of the contract.
C) Bob received $550 from the writer of the contract.
D) Bob received $55,000 from the writer of the contract.
Answer: C
9) The premium on a stock index call would be expected to increase as
the
A) market becomes more volatile.
B) option life nears expiration.
C) index price falls further below the strike price.
D) underlying securities stabilize in value.
Answer: A
10) ETF options are settled in
A) cash.
B) ETF shares.
C) share of the companies in the index.
D) The writer has the choice of settling in either cash or ETF shares.
Answer: B
11) Anthony is confident that shares of SolarTech will greatly increase
in value, but thinks that it may be a year or more before that happens.
He should buy
A) ETF calls.
B) LEAP puts.
C) LEAP calls.
D) Index calls.
Answer: C
12) Stock index options can be used for which of the following
investment purposes?
I.
protect a portfolio from market declines