QUESTION 1

What is an optimal portfolio?

a.	An envelope portfolio which does not have any negative weights
b.	An envelope portfolio which has the constant c set equal to the risk free rate
c.	An envelope portfolio which has the constant c set equal to zero
d.	None of the above

QUESTION 2

Which of the following is true?

a.	The efficient frontier with short sales dominates the efficient frontier without short sales
b.	The efficeint frontier with and without short sales are exactly the same
c.	Short sale restriction has no effect on the efficient frontier
d.	The efficient frontier without short sales dominates the efficient frontier with short sales

QUESTION 3

What is the maximum loss on a protective put strategy of buying a stock at $40 and buying a put with strike of $40 for a cost of $2?

a.	$0
b.	$38
c.	$2
d.	$40

QUESTION 4

American put options will be

a.	worth the same as european puts
b.	worth more than the european puts
c.	None of the above
d.	worth less than the european puts

QUESTION 5

Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share

a.	increases to $206
b.	increases to $204
c.	decreases to $196
d.	decreases to $190

QUESTION 6

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price

a.	negatively; positively
b.	positively; negatively
c.	negatively; negatively
d.	positively; positively

QUESTION 7

What is the price of a call option using the Black-Scholes formula based on the data given below?

Time to expiration	= 6 months
Standard deviation	= 50 % per year
Exercise price	= 50
Stock price	= 50
Interest rate	= 3 % per year

a.	$3.21
b.	$6.59
c.	$8.07
d.	$7.34

QUESTION 8

A stock selling for $25 today will in 1 year be worth either $35 or $20. If the interest rate is 8% what is the value of the one year call option on the stock with an exercise price of $30, using the one period binomial model?

a.	1.9976
b.	3.4345
c.	5.6745
d.	2.1605

QUESTION 9

Current stock price = $55

Option time to maturity = 0.5

Option exercise price = $60

Interest rate = 10%

Call price = $3

Given the data above what is the price of a Put option with the same strike and time to maturity as the call option above?

a.	$6.09
b.	$9.67
c.	$3.43
d.	$5.07

QUESTION 10

Suppose you bought a call for $2 with an exercise price of $35 and wrote a call for $1 with an exercise price of $40. This strategy is called

a.	Butterfly
b.	Straddle
c.	Bull Spread
d.	Bear Spread

QUESTION 11

Which Excel function is used to generate random numbers from a standard normal distribution?

a.	Norm.S.Inv(Rand())
b.	Norm.S.Inv()
c.	Norm.Inv(Rand())
d.	Rand()

QUESTION 12

Which of the following is not a property of stock prices?

a.	The average return from holding a stock tends to decrease over time
b.	Changes in stock prices are continuous
c.	The uncertainty of stock returns increases over time
d.	Stock prices are uncertain

QUESTION 13

In the lognormal stock price equation what is t ?

a.	The stochastic part of the stock return
b.	The uncertain portion of the stock return
c.	The total stock return
d.	The certain portion of the stock return

QUESTION 14

Which of the following is not true?

a.	The underlying distribution of the stock returns has a mean equal to the risk free rate
b.	All of the above are not true
c.	Under risk neutral pricing, derivatives are priced by discounting their expected payoffs at the risk free rate
d.	Stock prices follow a normal distribution