1. 40, 90: The U.S.

carries about __% of the world's economy, but

domestic investors put in about __% of their money into the U.S.
economy.
2. A: An American put option can be exercised
a. any time on or before the expiration date
b. only on the expiration date
c. any time in the indefinite future
d. only after dividends are paid
e. none of the above
3. A: If the stock price increases, the price of a put option on that
stock ________ and that of a call option ________
a. decreases; increases
b. decreases; decreases
c. increases; decreases
d. increases; increases
e. does not change; does not change
4. A: A protective put strategy is
a. a long put plus a long position in the underlying asset
b. a long put plus a long call on the same underlying asset
c. a long call plus a short put on the same underlying asset
d. a long put plus a short call on the same underlying asset
e. none of the above
5. A: ________ is equal to (common shareholder's equity /
common shares outstanding)
a. Book value per share
b. Liquidation value per share
c. Market value per share
d. Tobin's Q
e. none of the above
6. A: Recent empirical research indicates __________.
a. that real rates of return on stocks are positively correlated with
inflation
b. that real rates of return on stocks are uncorrelated with
inflation
c. that real rates of return on stocks are negatively correlated with
inflation
d. the rail of the real rate of return on stocks to inflation is 1.0
e. nothing about real rates of return on stocks
7. A: High P/E ratios tend to indicter that a company will _______,
ceteris paribus
a. grow quickly
b. grow at the same speed as the average company
c. grow slowly
d. not grow
e. none of the above
8. B: Consider a one year maturity call option and a one year put
option on the same stock both with striking price $100. If the
risk 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. $17.50
b. $15.26
c. $10.36
d. $12.26
e. none of the above
9. B: If the currency of your country is depreciating, the result should
be to _______ exports and to _______ imports
a. stimulate; stimulate
b. stimulate; discourage
c. discourage; stimulate
d. discourage; discourage
e. not affect; not affect
10. B: According to the put-call parity theorem, the value of a
European put option on a non-dividend paying stock is equal to:
a. the call value plus the present value of the exercise price plus
the stock price
b. the call value plus the present value of the exercise price minus
the stock price
c. the present value of the stock price minus the exercise price
minus the call price
d. the present value of the stock price plus the exercise price
minus the call price
e. none of the above
11. B: The Option Clearing House Corporation is owned by
a. the Federal Reserve System
b. the exchanges on which stock options are traded
c. the major U.S. banks
d. the Federal Deposit Insurance Corporation
e. none of the above
12. B: Investors want high plowback ratios
a. for all firms
b. whenever ROE > k
c. whenever k > ROE
d. only when they are in low tax brackets
e. whenever bank interest rates are high
13. B: A put option on a stock is said to be out of the money if
a. the exercise price is higher than the stock price
b. the exercise price is less than the stock price
c. the exercise price is equal to the stock price
d. the price of the put is higher than the price of the call
e. the price of the call is higher than the price of the put
14. B: _______ are analysts who use information concerning
current and prospective profitability of a firm to assess the firm's
fair market value
a. Credit analysts
b. Fundamental analysts
c. Systems analysts
d. Technical analysts
e. Specialists
15. B: Before expiration, the time value of an in the money stock
option is always
a. equal to zero
b. positive
c. negative
d. equal to the stock price minus the exercise price
e. none of the above
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16. B: A futures contract
a. is an agreement to buy or sell a specified amount of an asset at
the spot price on the expiration date of the contract
b. is an agreement to buy or sell and specified amount of an asset
at a predetermined price on the expiration date of the contract
c. gives the buyer the right, but not the obligation, to buy an asset
some time in the future
d. is a contract to be signed in the future by the buyer and the
seller of the commodity
e. none of the above
17. B: A European call option can be exercised
a. any time in the future
b. only on the expiration date
c. if the price of the underlying asset declines below the exercise
price
d. immediately after dividends are paid
e. none of the above
18. C: Buyers of call options _______ required to post margin
deposits and sellers of put options ________ required to post
margin deposits
a. are; are not
b. are; are
c. are not; are
d. are not; are not
e. are always; are sometimes
19. C: Which Excel formula is used to execute the Black-Scholes
option pricing model?
a. NORMAL
b. ABNORMAL
c. NORMSDIST
d. DIST
e. NORMALDIST
20. C: In a futures contract the futures price is
a. determined by the buyer and the seller when the delivery of the
commodity takes place
b. determined by the futures exchange
c. determined by the buyer and sealer when they initiate the
contract
d. determined independently by the provider of the underlying
asset
e. none of the above
21. C: The terms of futures contracts _________ standardized, and
the terms of forward contracts _________ standardized
a. are; are
b. are not; are
c. are; are not
d. are not; are not
e. are; may or may not be
22. C: The maximum loss a buyer of a stock call option can suffer is
equal to
a. the striking price minus the stock price
b. the stock price minus the value of the call
c. the call premium
d. the stock price
e. none of the above
23. C: All else equal, call option values are lower
a. in the month of May
b. for low dividend payout policies
c. for high dividend payout policies
d. A and B
e. A and C
24. C: Construction Machinery Company has an expected ROE of
11%. The dividend growth rate will be ______ if the firm follows
a 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 paribus
a. grow quickly
b. grow at the same speed as the average company
c. grow slowly
d. P/E ratios are unrelated to growth
e. none of the above
26. C: Some successful principles for stock picking according to
Malkiel are:
a. Don't ignore the trend
b. Buy stock values
c. Trade as little as possible
d. A and B
e. 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 coming
year. The intrinsic value of Dominion Oil stock should be
a. $28.12
b. $35.55
c. $60.00
d. $72.00
e. none of the above
28. C: One of the problems with attempting to forecast stock market
values is that
a. there are no variables that sen to predict market return
b. the earnings multiplier approach can only be used at the firm
level
c. the level of uncertainty surrounding the forecast will always be
quite high
d. dividend payout ratios are highly variable
e. none of the above
29. D: All the inputs in the Black-Scholes Option Pricing Model are
directly observable EXCEPT
a. the price of the underlying security
b. the risk free rate of interest
c. the time to expiration
d. the variance of returns of the underlying asset return
e. none of the above
30. D: The "normal" range of price-earnings ratios for the S&P500
Index is
a. between 2 and 10
b. between 5 and 15
c. less than 8
d. between 10 and 20
e. greater than 20
31. D: Malkiel argues that stock returns were very low during the
70's because
a. Inflation had caused corporate earnings to drop
b. OPEC and oil shocks
c. Tight monetary policy by the Fed
d. Low P/E ratios because of increased perception of risk
e. None of the above
32. D: Futures contracts ________ traded on an organized
exchange, and forward contrast are _________ traded on an
organized exchange
a. are not; are
b. are; are
c. are not; are not
d. are; are not
e. are; may or may not be
33. D: A company paid a dividend last year of $1.75. The expected
ROE for next year is 14.5%. An appropriate required return on the
stock is 10%. If the firm has a plowback ratio of 75%, the
dividend in the coming year should be
a. $1.80
b. $2.12
c. $1.77
d. $1.94
e. 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 at
720. What will happen when you exercise the option?
a. You will have to pay $680
b. You will receive $720
c. You will receive $680
d. You will receive $4000
e. You will have to pay $4000
35. D: All of the following factors affect the price of a stock option
EXCEPT
a. the risk-free rate
b. the riskiness of the stock
c. the time to expiration
d. the expected rate of return on the stock
e. none of the above
36. D: A covered call position is
a. the simultaneous purchase of the call and the underlying asset
b. the purchase of a share of stock with a simultaneous sale of a
put on that stock
c. the short sale of a share of stock with a simultaneous sale of a
call on that stock
d. the purchase of a share of stock with a simultaneous sale of a
call on that stock
e. the simultaneous purchase of a call and sale of a put on the
same stock
37. D: Malkiel, in "Random Walk," discusses the Roth IRA. In the
Roth IRA:
a. Taxes are deferred until withdrawn at retirement
b. Withdrawals after retirement are tax free
c. You are taxed "upfront"
d. B and C
e. 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 the
expiration date
b. buy the underlying asset at the exercise price on or before the
expiration date
c. sell the option in the open market prior to expiration
d. A and C
e. B and C
39. E: The price that the buyer of the option pays to acquire the
option is called the
a. strike price
b. exercise price
c. execution price
d. acquisition price
e. 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 price
reaches the trigger point, without allowing for a subsequent
rebound, while the put allows the holder to wait
b. the stop-loss order is costless to place
c. the stop-loss order may actually be executed at a price below
the trigger price
d. both A and B are true
e. both A and C are true
41. E: The price that the buyer of a call option pays for the underlying
asset if she executes her option is called the
a. strike price
b. exercise price
c. execution price
d. A or C
e. A or B