Portfolio Management
Chapter Exam Questions
Course Introduction
Portfolio Management explores the principles, tools, and strategies used to build and manage investment portfolios for individuals and institutions. The course covers key topics such as asset allocation, diversification, risk-return trade-offs, portfolio optimization, and performance evaluation. Students learn about different asset classes, including equities, fixed income, and alternative investments, as well as the use of modern portfolio theory and quantitative techniques. Emphasis is placed on practical decision-making, understanding investor goals and constraints, and adapting to changing market conditions, equipping students with the skills needed to construct and manage portfolios that align with specific risk and return objectives.
Recommended Textbook
Introduction to Derivatives and Risk Management 9th Edition by Don M. Chance
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Chapter 1: Introduction
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Q1) Most derivative contracts terminate with delivery of the underlying asset.
A)True
B)False Answer: False
Q2) Options, forwards, swaps, and futures are financial assets.
A)True
B)False Answer: False
Q3) Derivatives permit investors to manage their risk more efficiently.
A)True
B)False
Answer: True
Q4) The positive relationship between risk and return is called A) expected return
B) market efficiency
C) the law of one price
D) arbitrage
E) none of the above
Answer: E
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Chapter 2: Structure of Options Markets
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Q1) Which of the following index options is the most widely traded?
A) S&P 500
B) Nikkei 225
C) Technology Index
D) New York Stock Exchange Index
E) none of the above
Answer: A
Q2) The majority of options exchanges in the U.S. are fully automated.
A)True
B)False
Answer: False
Q3) Option traders incur which of the following types of costs?
A) margin requirements
B) taxes
C) stock trading commissions
D) a and b
E) a, b and c
Answer: E
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Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask discount of 5.86. What is the best estimate of the risk-free rate as given in the text?
A) 5.86 %
B) 5.83 %
C) 6.11 %
D) 6.14 %
E) none of the above
Answer: C
Q2) An American call on a non-dividend paying stock will be worth more than a European call on that same stock.
A)True
B)False
Answer: False
Q3) The lower the exercise price, the more valuable the call option.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Option Pricing Models: The Binomial Model
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Sample Questions
Q1) The binomial model will give a higher price for an American call on a stock that pays no dividends than if that call is European.
A)True
B)False
Q2) All of the following are variables used to determine a call option's price except
A) the risk-free rate
B) the probability of stock price movement
C) the exercise price
D) the possible future stock prices at expiration
E) none of the above
Q3) The binomial probabilities are probabilities if investors were risk neutral.
A)True
B)False
Q4) A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.
A)True
B)False
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Chapter 5: Option Pricing Models: The
Black-Scholes-Merton Model
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Q1) The Black-Scholes-Merton model assumes that the volatility does not change throughout the option's life.
A)True
B)False
Q2) A riskless hedge requires more shares of stock than call options.
A)True
B)False
Q3) What is the reason for executing a gamma hedge?
A) the volatility can change
B) the stock price can make a large move
C) the stock price moves are too small for a delta hedge to work
D) there is no true risk-free rate
E) none of the above
Q4) The time to expiration of an option is based on a 360-day year.
A)True
B)False
Q5) One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.
A)True
B)False
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Chapter 6: Basic Option Strategies
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Q1) Selling a put is a bullish strategy that has a limited gain (the premium) and a large, but limited, potential loss.
A)True
B)False
Q2) The difference in profit from an actual put and a synthetic put is
A) X
B) S<sub>T</sub> - X
C) X - S<sub>T</sub>
D) S<sub>T</sub> + X(1 + r)<sup>-T</sup>
E) none of the above
Q3) Early exercise imposes a risk to all but one of the following transactions.
A) a short call
B) a short put
C) a protective put
D) an uncovered call
E) none of the above
Q4) To maximize profits on a call purchase, one should hold the position for as short a time as possible.
A)True
B)False
Page 8
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) Early exercise is a disadvantage in which of the following transactions?
A) short box spread
B) put bear spread
C) long strip (2 puts and 1 call)
D) long strap (2 calls and 1 put)
E) none of the above
Q2) Suppose you closed the spread 60 days later. What will be the profit if the stock price is still at $50?
A) $41
B) $198
C) $302
D) $102
E) none of the above
For questions 7 and 8, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.
Q3) The risk of early exercise is of no concern to the holder of a long straddle.
A)True
B)False
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Chapter 8: Structure of Forward and Futures Markets
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Q1) One party to a futures transaction does not bear the risk that the other party will default.
A)True
B)False
Q2) Which of the following is a false statement related to options on futures?
A) options on futures are also known as futures options
B) options on futures are also known as options on the underlying instrument
C) options on futures is a derivative on a derivative
D) options on futures are also known as commodity options
E) all of the above statements are true related to options on futures
Q3) Margin in a futures transaction differs from margin in a stock transaction because
A) stock transactions are much smaller
B) delivery occurs immediately in a stock transaction
C) no money is borrowed in a futures transaction
D) futures are much more volatile
E) none of the above
Q4) Forward contracts are regulated by the Commodity Forward Trading Commission.
A)True
B)False
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Chapter 9: Principles of Pricing Forwards, Futures and Options on Futures
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Q1) The price of a futures contract that expires immediately is the spot price.
A)True
B)False
Q2) The price of a futures spread reflects the cost of carry until the time the spread is closed.
A)True
B)False
Q3) Forward and futures prices will be equal prior to expiration if interest rates are certain or if futures prices and interest rates are correlated.
A)True
B)False
Q4) A synthetic put option on futures could be constructed by buying a call option on futures and selling the futures.
A)True
B)False
Q5) American foreign currency calls will never be exercised early. A)True
B)False
11
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Chapter 10: Futures Arbitrage Strategies
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Q1) The implied interest rate based on Treasury bond carry arbitrage will decrease when the cheapest-to-deliver bond price increases, everything else held constant.
A)True
B)False
Q2) Suppose you observe the spot euro at $1.38/ , the U. S. risk-free interest rate of 0.25% (continuously compounded), and the European risk-free interest rate of 0.75% (continuously compounded). Identify the theoretical value of a six month foreign exchange futures contract (select the closest answer).
A) $1.3815/
B) $1.3765/
C) $1.3785/
D) $1.3825/
E) $1.3755/
Q3) If a stock index futures is at 455 and the pricing model says it should be at 458, an arbitrageur should buy the futures and sell short the stock.
A)True B)False
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Q1) A short hedge is one in which
A) the margin requirement is waived
B) the hedger is short futures
C) the hedger is short in the spot market
D) the futures price is lower than the spot price
E) none of the above
Q2) An anticipatory hedge is one in which
A) the basis is expected to fall
B) the hedger expects to make a profit on the futures
C) the spot position will be taken in the future
D) all of the above
E) none of the above
Q3) A hedge of a specific stock's price with stock index futures will reduce both systematic and unsystematic risk.
A)True
B)False
Q4) An investor who expects to purchase stock at a later date would use a short hedge to protect against stock price movements.
A)True
B)False
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Chapter 12: Swaps
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Q1) A plain vanilla interest rate swap is equivalent to issuing a fixed-rate bond and using the proceeds to buy a floating-rate bond or vice versa.
A)True
B)False
Q2) Find the upcoming payment interest payments in a currency swap in which party A pays U. S. dollars at a fixed rate of 5 percent on notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent on notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting.
A) party A pays $2,500,000, and party B pays SF1,400,000
B) party A pays SF1,400,000, and party B pays $2,500,000
C) party A pays SF1,750,000, and party B pays SF1,400,000
D) party A pays $2,500,000, and party B pays $2,000,000
E) party A pays $50 million, and party B pays SF35 million
Q3) The notional amount is never exchanged in an interest rate swap.
A)True B)False
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Chapter 13: Interest Rate Forwards and Options
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Q1) An FRA is most like which of the following transactions
A) an interest rate cap
B) an interest rate floor
C) an interest rate collar
D) a forward contract
E) none of the above
Q2) Find the payoff of an interest rate call option on the annual rate with an exercise rate of 10 percent if the one-period rate at expiration is 11 percent. (No days/360 adjustment is necessary and assume a $1 notional amount.)
A) 0.12
B) zero
C) 0.01
D) 0.0090
E) none of the above
Q3) A long interest rate cap is an appropriate strategy for a party that lends money.
A)True
B)False
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Chapter 14: Advanced Derivatives and Strategies
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Q1) A chooser option is similar to what other type of option strategy
A) put-call parity
B) a covered call
C) a protective put
D) a combination bull and bear spread
E) none of the above
Q2) Suppose a firm offers an equity-linked security. The face value is $1 million and its payoff is based on any appreciation in an equity index currently at 855.50. It has determined that of the $1 million raised, it can structure the option component so that its value is $135,000. Currently an at-the-money call option is worth $125. What percentage of the gain in the index can it offer?
A) 92 percent
B) 100 percent
C) 50 percent
D) 8.23 percent
E) none of the above
Q3) Portfolio insurance using stock and T-bills is less expensive than using stock and puts.
A)True
B)False
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Chapter 15: Financial Risk Management Techniques and Appplications
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Q1) Value at Risk estimates for portfolios must take into account the correlations among the various assets and liabilities in a portfolio.
A)True
B)False
Q2) A delta and gamma hedge is
A) one in which the combined spot and derivatives positions have a delta of zero and a gamma of zero.
B) one that is not guaranteed to be free of all risks
C) effective only for small changes in the underlying instrument.
D) all of the above statements are true
E) none of the above statements are true
Q3) Conditional Value at Risk is the expected loss, given that a loss occurs.
A)True
B)False
Q4) A delta and gamma hedge is one in which the combined spot and derivatives positions have a delta of zero and a gamma of zero.
A)True
B)False
Page 17
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Responsibilities of senior management include all of the following except
A) establish written policies
B) define roles and responsibilities
C) identify acceptable strategies
D) ensure that control systems are in place
E) all of the above
Q2) Prior to FAS 133, where on the financial statements were derivatives reported?
A) as contingent liabilities
B) as goodwill
C) as intangible assets
D) nowhere because they were off-balance sheet items
E) in Other Comprehensive Income
Q3) A risk management system that controls risk within a single department is considered to be centralized.
A)True
B)False
Q4) A fair value hedge is a transaction designed to protect the market value of an asset held.
A)True
B)False
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