When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____
their exposure to stock market conditions.
d. increase
For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model.
a. true
A stock portfolio has more volatility when its individual stock returns are uncorrelated.
a. true
Stocks that have relatively little trading are normally subject to less price volatility.
b. false
The main source of uncertainty in computing the return of a stock is the dividend to be received next year.
b. false
Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are
more volatile.
a. true
Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be
applied to derive the maximum expected loss of a stock portfolio for a given confidence level.
a. true
The ____ is not a factor used in the capital asset pricing model (CAPM) to derive the return of an asset.
d. dividend growth rate
When investors purchase an option that does not hedge their existing investments, the option can be referred to as
"naked.
a. true
As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets.
b. false
The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option
contract if the owner exercises the option.
b. false
Technical analysis relies on the use of ____ to make investment decisions.
d. recent stock price trends
The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the
stock's risk.
a. true
Speculators sell call options on currencies that they expect to strengthen against the dollar.
b. false
The ____ is not a factor affecting the call option premium.
c. current price of futures contracts on the underlying instrument
Put options are more typically used to hedge when portfolio managers are mainly concerned about a temporary decline
in a stock's value.
a. true
European-style stock option
d. none of these are correct
The market risk premium is stable over time and is not affected by stock market conditions
b. false
The Sharpe index measures the
d. excess return above the risk free rate per unit of risk
Zilo stock has an average return minus the average risk-free rate of 5 percent, a beta of 1, and a standard deviation of
returns of 20 percent. The Sharpe index of Zilo stock is
c. 0.25
The general mood of investors represents:
a. investor sentiment
When a firm's announced earnings are lower than expected, investors will increase their valuation of the firm's future
cash flows and its stock.
b. false
The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.
b. treynor
A beta of 1.8 implies that the stock has a risk premium of 1.8 percent.
b. false
Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their
risk.
a. true
The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option
premium.
c. higher; higher
Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific
stock in the option-pricing model, it is possible to derive the anticipated volatility level.
a. true
The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model
a. treasury bond rate
The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's
volatility
a. Sharpe
On an exchange, option trades can be executed
d. all of these are correct
According to the capital asset pricing model, the required return by investors on a security is
d. none of these are correct
The Options Clearing Corporation (OCC) serves as a guarantor on option contracts traded in the United States.
a. true
______ execute transactions desired by investors and trade stock options for their own account.
c. market makers
Even though a foreign stock appears to be overvalued in its own country, the stock may not generate a reasonable
return for a U.S. investor if the currency of that country appreciates against the U.S. dollar.
a. true
Market makers can execute stock option transactions for customers but do not trade stock options for their own account.
b. false
Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____.
a. available; in numerous non-U.S. countries
The dividend discount model states that the price of a stock should reflect the present value of the stock's future
dividends.
a. true
If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____
than the exercise price when the payables are due.
e. exercise the option; greater AND let the option expire; less
Sorvino Co. is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino
stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.
d. 24.62
The price-earnings valuation method applies the ____ price-earnings ratio to the ____ earnings per share in order to
value the firm's stock.
d. average industry; firm's
The "January effect" refers to a large
a. rise in rice of small stocks in January
The U.S. government's budget deficit has a significant impact on the bond market but does not affect the stock market.
b. false
Value at risk estimates the ____ a particular investment for a specified confidence level.
c. largest expected loss to
The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the
firm's future earnings or in choosing the industry composite used to derive the PE ratio.
a. true
According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be
____ affected by a weak dollar. Stock prices of U.S. importing firms could be ____ affected by a weak dollar.
b. favorable; adversley
A higher beta for an asset reflects
c. higher covariance between the asset's returns and the market returns
Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures.
b. false
An option with a higher exercise price has a higher call option premium and a lower put option premium
b. false
American-style stock options can be exercised only just before expiration.
b. false
Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than
about beta.
b. false
Backdating occurs when CEOs (or other executives) reset the date that their options were granted to an earlier date
when the stock price was lower
a. true
A firm's stock price is affected not only by macroeconomic and market conditions but also by firm-specific conditions.
a. true
Several call options are available for a given stock, and the risk-return potential will vary among them
a. true
While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings
do not always provide an accurate forecast of the future.
a. true
The credit crisis caused major problems in the mortgage market but had no impact on the stock market.
b. false
The motive for CEOs to backdate options is that it allows them to exercise the options at a lower exercise price.
a. true
The standard deviation of a stock's returns is used to measure the stock's
d. risk-free rate
Which of the following is not a type of factor that drives stock prices, according to your text?
d. all of the above are factors that affect stock prices
The prime rate is commonly used as a proxy for the risk-free rate in the capital asset pricing model (CAPM)
b. false
The ____ is often used to estimate the required rate of return for any firm with public traded stock.
a. capital asset pricing model
Which of the following is NOT true with respect to market makers?
c. they are not subject to a risk of loss on their positions in options
A portfolio's beta is the sum of the individual forecasted betas, weighted by the market value of each stock
b. false
If the returns of two stocks are perfectly correlated, then
c. their correlation coefficient should equal 1.0
The value-at-risk method is intended to warn investors about the potential maximum loss that could occur.
a true
The sale of a call option on a stock the seller already owns is referred to as
a. a covered call
Speculators purchase currency ____ on currencies they expect to ____ against the dollar.
d. put options; weaken
A stock's beta can be measured from the estimate of the ________ using regression analysis.
d. slope coefficient
A key requirement for listing stock options on an exchange is that the trading volume of the underlying stock must
reach a certain minimum level.
a. true
Option trading is regulated by the
c. securities and exchange commission
The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by
the stock's :
b. beta