Portfolio Management
Final Test Solutions
Course Introduction
Portfolio Management focuses on the principles, strategies, and tools used to construct and manage investment portfolios that meet specific financial objectives. The course covers essential topics such as asset allocation, diversification, risk-return trade-offs, portfolio optimization, and performance evaluation. Students will learn how to analyze investment vehicles, assess market conditions, implement portfolio strategies, and monitor results using both quantitative and qualitative approaches. Case studies and practical exercises are used to connect theory with real-world investment decisions, preparing students for professional roles in asset management and financial advisory services.
Recommended Textbook
Introduction to Derivatives and Risk Management 8th Edition by Don M. Chance
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16 Chapters
781 Verified Questions
781 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) Uncertainty of future sales and cost of inputs are examples of financial risks businesses may face.
A)True
B)False
Answer: False
Q2) Options on futures are also known as
A)spot options
B)commodity options
C)exchange options
D)security options
E)none of the above
Answer: B
Q3) Derivatives permit investors to manage their risk more efficiently.
A)True
B)False
Answer: True
Q4) Lower transaction costs are one advantage of derivative markets.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Structure of Options Markets
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Sample Questions
Q1) Position limits are restrictions on the number of transactions an investor can execute on a given day.
A)True
B)False
Answer: False
Q2) An out-of-the-money call option has an exercise price less than the stock price.
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
Q4) A market maker always avoids the cost of the bid-ask spread.
A)True
B)False
Answer: False
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Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) High volatility is bad for option holders because it increases the probability that the option will expire out-of-the-money.
A)True
B)False
Answer: False
Q2) Holding everything else constant,put options are more expensive in periods of high interest rates.
A)True
B)False
Answer: False
Q3) At expiration the call price must converge to the stock price.
A)True
B)False Answer: False
Q4) 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) Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.
A)True
B)False
Q2) If there is one period remaining and no possibility of the option expiring in-the-money,the hedge ratio will be zero.
A)True
B)False
Q3) In a multiperiod binomial model,an arbitrage profit cannot be earned until the option expires.
A)True
B)False
Q4) Suppose S = 70,X = 65,r = 0.05,p = 0.6,C<sub>u</sub> = 7.17,C<sub>d</sub> = 1.22 and there is one period left in an American call's life.What will the option be worth?
A)6.83
B)0.00
C)4.56
D)5.00
E)none of the above
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Chapter 5: Option Pricing Models: the
Black-Scholes-Merton Model
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Sample Questions
Q1) The binomial model always gives the same option price as the Black-Scholes-Merton model.
A)True
B)False
Q2) In order to compute the implied volatility,one must force the option to be correctly priced by the model.
A)True
B)False
Q3) When the risk-free rate is zero,the Black-Scholes formula converges to the intrinsic value.
A)True
B)False
Q4) Which of the following characteristics of the Black-Scholes-Merton model is not correct?
A)it is a discrete time model
B)it is the limit of the binomial model
C)it is a continuous time model
D)it gives the price of a European option
E)none of the above
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) Which of the following statements about a covered call writing strategy is true?
A)the losses are limited
B)return and risk are greater than that of simply holding the stock
C)it is a cheaper form of insurance than a protective put
D)it generally makes a large number of small profits
E)none of the above
Q2) The maximum loss on a call purchase is the premium on the call.
A)True
B)False
Q3) Any strategy consisting of only long options will lose money if the stock price stays the same.
A)True
B)False
Q4) A covered call writer who prefers even less risk should
A)get rid of the call
B)switch to a call with a lower exercise price
C)get rid of the stock
D)switch to a call with a higher exercise price
E)none of the above
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) Which of the following is the best strategy for an expected fall in the market?
A)long strip (2 puts and 1 call)
B)put bull spread
C)calendar spread
D)butterfly spread
E)none of the above
Q2) If a straddle is closed prior to expiration,the investor can recover some of the time value of either the call or the put but not both.
A)True
B)False
Q3) A call butterfly spread is a bullish strategy that is profitable if stock prices increase.
A)True
B)False
Q4) What is the net present value of the box spread?
A)$9.84
B)$5.00
C)$16.00
D)$1.84
E)none of the above
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Chapter 8: The Structure of Forward and Futures Markets
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Sample Questions
Q1) Futures funds have typically provided outstanding returns to their investors.
A)True
B)False
Q2) Very few futures contracts are terminated in delivery of the underlying commodity or security.
A)True
B)False
Q3) Which of the following is not a futures exchange?
A)Minneapolis Grain Exchange
B)CBOE Futures Exchange
C)Chicago Climate Exchange
D)Kansas City Board of Trade
E)MidAmerica Commodity Exchange
Q4) A hedge fund is a very risky form of investment.
A)True
B)False
Q5) The clearinghouse is the middleman in a futures trade.
A)True
B)False
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Chapter 9: Principles of Pricing Forwards, Futures, and Options on Futures
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Sample Questions
Q1) If the U.S.government announced that it would allow the dollar to drop in foreign currency markets,the price of a euro put would probably fall.
A)True
B)False
Q2) Normal backwardation and contango are mutually exclusive conditions for a market.
A)True
B)False
Q3) Find the value of a European put option on futures if the futures price is 72,the exercise price is 70,the continuously compounded risk-free rate is 8.5 percent,the volatility is .38 and the time to expiration is three months.
A)6.30
B)12.90
C)4.34
D)2.00
E)none of the above
Q4) Interest-rate parity is a cost-of-carry model.
A)True
B)False
11
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) Determine the conversion factor for delivery of the 7 1/4's off May 15,2026 on the March 2010 T-bond futures contract.
A)1.225
B)0.932
C)1.083
D)1.127
E)1.509
Q2) Much of the volume of stock transactions in program trading occurs through the New York Stock Exchange's DOT system.
A)True
B)False
Q3) If the invoice price of bond A is 122,the invoice price of bond B is 95,the adjusted spot price of bond A is 127 and the adjusted spot price of bond B is 97,the better bond to deliver is bond B.
A)True
B)False
Q4) The implied repo rate is the return on an overnight repurchase agreement.
A)True
B)False
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Sample Questions
Q1) Find the profit if the investor buys a July futures at 75,sells an October futures at 78 and then reverses the July futures at 72 and the October futures at 77.
A)-3
B)-2
C)2
D)1
E)none of the above
Q2) Which of the following measures is used in the price sensitivity hedge ratio for bond futures?
A)beta
B)duration
C)correlation
D)variance
E)none of the above
Q3) The implied duration of a futures contract is the duration of the underlying bond measured as if one owned the bond today.
A)True
B)False
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Chapter 12: Swaps
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Sample Questions
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) A risk of equity swaps is that the company will pay dividends.
A)True
B)False
Q3) Which of the following is not a type of swap?
A)settlement swaps
B)commodity swaps
C)interest rate swaps
D)equity swaps
E)currency swaps
Q4) The market value of a swap is zero between settlement dates..
A)True
B)False
Q5) A swap involving two floating rates is called a basis swap.
A)True
B)False
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) Pricing an interest rate cap is done by pricing the component caplets and adding up their values.
A)True
B)False
Q2) For firms that may need to enter into a swap in the future,a forward swap serves as well as a swaption.
A)True
B)False
Q3) An FRA differs from an interest rate swap in which of the following ways?
A)An FRA has more credit risk
B)FRAs are federally regulated
C)Traditionally the payment in an FRA is delayed
D)FRAs are used only by banks and swaps are used only by corporations
E)none of the above
Q4) Swaptions are like forward swaps in which of the following ways
A)Both are free of credit risk
B)Both require the execution of a swap at expiration
C)They have the same price
D)Both are traded on swaption exchanges
E)none of the above
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Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) Equity-linked debt is equivalent to a zero coupon bond and a given number of call options.
A)True
B)False
Q2) What is the minimum value of the insured portfolio?
A)$16,672,344
B)$12,500,000
C)$12,091,709
D)$12,244,898
E)$13,375,000
Q3) An option to buy an option is called a compound option.
A)True
B)False
Q4) The rate on a constant maturity swap is based on a U.S.Treasury security of a given maturity.
A)True
B)False
Q5) Large stock price moves reduce the effectiveness of portfolio insurance.
A)True
B)False
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Chapter 15: Financial Risk Management Techniques and Applications
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Sample Questions
Q1) A total return swap allows substitution of the total return on a bond for the total return on a loan of comparable maturity.
A)True
B)False
Q2) In option terms,the limited liability of corporate stockholders is
A)a forward contract
B)a call option
C)a put option
D)a protective put
E)a fiduciary call
Q3) Which of the following are not methods of determining the VAR?
A)simulation method
B)historical method
C)estimation method
D)analytical method
E)none of the above
Q4) Model risk can occur when the wrong pricing models are used.
A)True
B)False
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Metalgesellschaft lost about $1.3 billion doing what?
A)hedging short-term commitments with long-term options
B)using crude oil futures options to hedge crude oil futures
C)trading futures spreads on crude oil
D)hedging fixed rate oil price commitments with swaptions
E)none of the above
Q2) A risk management system that controls risk within a single department is considered to be centralized.
A)True
B)False
Q3) A company's auditors are not typically trained to serve in a risk management capacity.
A)True
B)False
Q4) The primary distinction between FAS 133 and IAS 39 is
A)IAS 39 does not permit hedge accounting
B)IAS 39 was adopted earlier than FAS 133
C)IAS 39 applies only to publicly traded corporations
D)IAS 39 applies to all financial assets and liabilities,not just derivatives
E)none of the above
Page 18
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