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Multiple Choice - Financial Markets

Multiple Choice Questions:

1. Bob sold short 300 shares of a stock at $55 per share. The initial margin is 60%, which was met exactly. At what (closest) stock price will he receive a margin call if the maintenance margin is 35%?

A)$51
B)$69
C)$62
D)$45

2.Which of the following countries has an equity index that lies on the efficient frontier generated by allowing international diversification?

A)United States
B)United Kingdom
C)Japan
D)Norway
E)none of the above as each of these countries' indexes fall inside the efficient
frontier.

3.An open-end mutual fund had year-end assets of $279,000,000 and liabilities of
$43,000,000. If the fund's NAV was $42.13, how many shares must have been held in
the fund?

A)43,000,000
B)6,488,372
C)5,601,709
D)1,182,203
E)None of the above.

4.The straightforward generalization of the simple CAPM to international
stocks is problematic because __________.

A) inflation risk perceptions by different investors in different countries will differ as
consumption baskets differ
B) investors in different countries view exchange rate risk from the perspective of
different domestic currencies
C) taxes, transaction costs and capital barriers across countries make it difficult for
investor to hold a world index portfolio
D) all of the above
E) none of the above.

5. Consider the multifactor model APT with two factors. Portfolio A has a beta of
0.75 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and
factor 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The
expected return on portfolio A is __________if no arbitrage opportunities exist.

A)13.5%
B)15.0%
C)16.5%
D)23.0%
E)none of the above

6.Consider the multifactor APT. The risk premiums on the factor 1 and factor 2
portfolios are 5% and 3%, respectively. The risk-free rate of return is 10%. Stock A has
an expected return of 19% and a beta on factor 1 of 0.8. Stock A has a beta on factor 2 of
________.

A)1.33
B)1.50
C)1.67
D)2.00
E)none of the above

7.The potential loss for a writer of a naked call option on a stock is

A)limited
B)unlimited
C)larger the lower the stock price.
D)equal to the call premium.
E)none of the above.

8. 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.

9. If John purchases one IBM May 100 call contract at $5 and writes one IBM
May 105 call contract at $2. The maximum potential profit of his strategy is

A)$600.
B)$500.
C)$200.
D)$300.
E)$100

10. If John purchases one IBM May 100 call contract at $5 and writes one IBM
May 105 call contract at $2, his strategy is called-

A) a short straddle.
B) a money spread
C) a horizontal straddle.
D) a covered call.
E) none of the above.

Solution Summary

This posting gives the solution key for a set of Multiple Choice Questions based on the Financial Markets.

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