Risk Management and Derivatives
Exam Questions
Course Introduction
This course explores the fundamental principles and practices of risk management, with a particular emphasis on the use of derivative instruments. Students will examine the identification, measurement, and mitigation of various types of financial risks including market, credit, and operational risks faced by individuals and institutions. The course covers key derivative products such as forwards, futures, options, and swaps, alongside their pricing, valuation, and strategic applications in hedging and speculation. Real-world case studies and analytical tools will be used to deepen understanding of how derivatives can effectively manage risk in dynamic financial markets.
Recommended Textbook
Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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22 Chapters
2045 Verified Questions
2045 Flashcards
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Chapter 1: The Investment Setting
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Sample Questions
Q1) Refer to Exhibit 1.2. What was your annual holding period yield?
A) -0.0466
B) -0.1333
C) 0.0333
D) 0.3534
E) 0.8667
Answer: A
Q2) A decrease in the expected real growth in the economy, all other things constant, will cause the security market line to
A) shift up.
B) shift down.
C) have a steeper slope.
D) have a flatter slope.
E) remain unchanged.
Answer: B
Q3) The variance of expected returns is equal to the square root of the expected returns.
A)True
B)False
Answer: False
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Page 3
Chapter 1: The Investment Setting: Part A
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Sample Questions
Q1) An investment has a standard deviation of 12 percent and an expected return of 7 percent. What is the coefficient of variation for this investment?
A) 1.714
B) 1.372
C) 0.714
D) 0.583
E) 0.500
Answer: A
Q2) Refer to Exhibit 1A.1. The standard deviation of your expected return from this investment is
A) 0.001.
B) 0.004.
C) 0.124.
D) 1.240.
E) None of these are correct.
Answer: C
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Chapter 2: Asset Allocation and Security Selection
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77 Flashcards
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Sample Questions
Q1) For an investor with a time horizon of four years and higher risk tolerance, an appropriate asset allocation strategy would be
A) 100 percent cash.
B) 30 percent cash, 50 percent bonds, and 20 percent stocks.
C) 20 percent cash, 40 percent bonds, and 40 percent stocks.
D) 10 percent cash, 40 percent bonds, and 50 percent stocks.
E) 100 percent bonds.
Answer: C
Q2) The asset allocation decision must involve a consideration of A) cultural differences.
B) the objectives stated in the investor's policy statement.
C) the types of assets that are appropriate for the investor.
D) the risk associated with different investments.
E) All of these are correct.
Answer: E
Q3) Arts and antiques are inferior inflation hedges compared to long-term bonds and common stocks.
A)True
B)False
Answer: False
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Chapter 2: Asset Allocation and Security Selection: Part A
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Sample Questions
Q1) Refer to Exhibit 2A.1. Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q2) Refer to Exhibit 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q3) What is the correlation coefficient for two assets with a covariance of .0032, if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
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Page 6
Chapter 3: Organization and Functioning of Securities Markets
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Sample Questions
Q1) Refer to Exhibit 3.5. What is your rate of return on the investment?
A) 10.48 percent
B) 12.87 percent
C) -13.98 percent
D) -24.49 percent
E) -15.05 percent
Q2) Short selling is practiced when an investor borrows part of the cost of the investment,e.g., they are "short" on cash.
A)True
B)False
Q3) You sell short 100 shares of Hi-Light Corporation when it is trading at $70. Your margin requirement is 50 percent. Assuming there was no commission and the maintenance margin is 25 percent, at what stock price would you receive a margin call?
A) $76
B) $80
C) $84
D) $88
E) $92
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Chapter 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) Refer to Exhibit 4.4. Calculate the average annual rate of change for this index for the five-year period using the arithmetic mean.
A) 0.28%
B) 1.28%
C) 2.80%
D) 3.58%
E) 6.38%
Q2) Refer to Exhibit 4.3. Calculate the average annual rate of change for GB Industries for the five-year period using the arithmetic mean.
A) 0.098%
B) 9.80%
C) 8.50%
D) 8.00%
E) 89.00%
Q3) The correlations among the U.S. investment-grade-bond series were very high because all rates of return for investment-grade bonds over time are impacted by common macroeconomic variables.
A)True
B)False
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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162 Verified Questions
162 Flashcards
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Sample Questions
Q1) Prices in efficient capital markets fully reflect all available information and rapidly adjust to new information.
A)True
B)False
Q2) The T-Bill-Eurodollar yield spread widens during periods of international crisis.
A)True
B)False
Q3) If statistical tests of stock returns over time support the efficient market hypothesis, then the resulting correlations should be
A) positive.
B) negative.
C) zero.
D) lagged.
E) skewed.
Q4) The prospect theory contends that utility depends on deviations from moving reference points rather than absolute wealth.
A)True
B)False
Page 9
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) If equal risk is added moving along the envelope curve containing the best possible combinations the return will
A) decrease at an increasing rate.
B) decrease at a decreasing rate.
C) increase at an increasing rate.
D) increase at a decreasing rate.
E) remain constant.
Q2) Refer to Exhibit 6.2. What is the standard deviation of this portfolio?
A) 5.45%
B) 18.64%
C) 20.0%
D) 22.5%
E) 13.65%
Q3) A portfolio is efficient if no other asset or portfolios offer higher expected return with the same (or lower) risk or lower risk with the same (or higher) expected return.
A)True
B)False
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10
Chapter 6: An Introduction to Portfolio Management: Part A
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Sample Questions
Q1) Refer to Exhibit 6A.1. Show the minimum portfolio variance for a two-stock portfolio when r<sub>1.2</sub> = 1.
A) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) -E( \(\sigma\)2)]
B) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
C) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
D) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
E) None of these are correct.
Q2) Refer to Exhibit 6A.1. What weight of security 1 gives the minimum portfolio variance when r<sub>1.2</sub> = .60, E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
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11
Chapter 6: An Introduction to Portfolio Management: Part B
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Sample Questions
Q1) Refer to Exhibit 6B.1. Show the minimum portfolio variance for a portfolio of two risky assets when r<sub>1.2</sub> = -1.
A) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
B) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
C) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
D) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
E) None of these are correct.
Q2) Refer to Exhibit 6B.1. What is the value of W<sub>1</sub> when r<sub>1.2</sub> = -1 and E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .12?
A) 45.46 percent
B) 50.00 percent
C) 59.45 percent
D) 54.55 percent
E) 74.55 percent
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12
Chapter 7: Asset Pricing Models
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152 Flashcards
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Sample Questions
Q1) Fama and French suggest a three-factor model approach. Which of the following is NOT included in their approach?
A) excess returns to a broad market index
B) return differences between small-cap and large-cap portfolios
C) return differences between industry characteristics
D) return differences between value and growth stocks
E) return differences between foreign stocks
Q2) An investor wishes to construct a portfolio consisting of a 70 percent allocation to a stock index and a 30 percent allocation to a risk-free asset. The return on the risk-free asset is 4.5 percent, and the expected return on the stock index is 12 percent. Calculate the expected return on the portfolio.
A) 8.25 percent
B) 16.50 percent
C) 17.50 percent
D) 9.75 percent
E) 14.38 percent
Q3) There can be only one zero-beta portfolio.
A)True
B)False
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Chapter 8: Equity Valuation
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Sample Questions
Q1) The P/E ratio for BMI Corporation is 21, and the P/S ratio is 5.2. The industry P/E ratio is 35, and the industry P/S ratio is 7.5. Based on relative valuation, BMI is
A) undervalued on the basis of relative P/E and relative P/S.
B) overvalued on the basis of relative P/E and undervalued on the basis of relative P/S.
C) undervalued on the basis of relative P/E and overvalued on the basis of relative P/S.
D) overvalued on the basis of relative P/E and relative P/S.
E) overvalued on the basis of relative P/E.
Q2) The importance of an industry's performance on an individual stock's performance varies across industries.
A)True
B)False
Q3) Refer to Exhibit 8.4. The dividends for years 1, 2, and 3 are
A) $1.5, $2.0, and $2.05.
B) $1.64, $1.78, and $1.94.
C) $1.64, $1.94, and $2.24.
D) $1.5, $2.40, and $3.30.
E) $2.07, $2.14, and $2.21.
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Page 14
Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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216 Flashcards
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Sample Questions
Q1) Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.
A)True
B)False
Q2) Interest rate spread, 10-year Treasury bonds less federal funds, is listed as a lagging indicator in the Conference Board.
A)True
B)False
Q3) Refer to Exhibit 9.7. What will FCFE be three years from now?
A) 108.90
B) 116.52
C) 117.00
D) 119.79
E) 120.21
Q4) Refer to Exhibit 9.1. What is your expectation of the market P/E ratio?
A) 8.33
B) 5.33
C) 9.03
D) 6.02
E) 3.24
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Chapter 10: The Practice of Fundamental Investing
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Sample Questions
Q1) When a company acquires another public company, it typically pays a significant premium above the previous market price.
A)True
B)False
Q2) The fee paid to the underwriter is called the
A) tactical spread.
B) net spread.
C) gross spread.
D) listing fee.
E) banking fee.
Q3) Which of the following facts about executive compensation is TRUE?
A) The level of compensation of the top five earners within each public company is not disclosed.
B) Officers are permitted to hedge their stock and option awards.
C) CEO compensation has increased much faster than the wages of the other corporate employees.
D) Aligning compensation to share price will align management to shareholders.
E) The majority of the compensation committee must be dependent directors.
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Page 16
Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) Which of the following statements about investment style is FALSE?
A) Growth stocks generally have smaller capitalizations than value stocks.
B) Value stocks have P/E and P/B ratios significantly lower than those of growth stocks.
C) Value stocks dividend yields are much higher than those of growth stocks.
D) Growth and levels of earnings is higher in growth stocks.
E) Value stocks have a higher risk premium.
Q2) Fund XYZ had a pretax return of 10.2 percent and a tax-adjusted return of 9.5 percent. Calculate Fund XYZ's tax cost ratio.
A) 0.006
B) 0.106
C) 0.116
D) 0.342
E) 0.635
Q3) The three basic techniques for constructing a passive index are: full replication, sampling, and linear programming.
A)True
B)False
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Chapter 12: Bond Fundamentals and Valuation
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Sample Questions
Q1) Refer to Exhibit 12.1. What is the estimated yield on Treasury securities?
A) 4.188 percent
B) 5.428 percent
C) 5.371 percent
D) 4.132 percent
E) 4.753 percent
Q2) Which type of bond is backed by the full faith and credit of the issuer and its entire taxing power?
A) Fannie Mae
B) Freddie Mac
C) GSEs
D) general obligation bonds
E) revenue bonds
Q3) Instruments for intermediate-term issues with maturities in excess of one year but less than 10 years are known as notes.
A)True
B)False
Q4) The yield to maturity is normally equal to the coupon rate.
A)True
B)False
Page 18
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Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Reinvestment risk is greatest for bonds that have
A) short maturities and low coupon rates.
B) long maturities and high coupon rates.
C) short maturities and high coupon rates.
D) long maturities and low coupon rates.
E) None of these are correct.
Q2) A bond swap involves liquidating a current bond position and later investing in a similar issue under more favorable conditions.
A)True
B)False
Q3) Refer to Exhibit 13.7. The realized compound yield on the current bond is
A) 6.00%.
B) 7.00%.
C) 8.00%.
D) 10.00%.
E) 12.00%.
Q4) A swap relies heavily on interest rate expectations.
A)True
B)False
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Refer to Exhibit 14.2. Assuming no commissions or taxes, what is the annualized percentage gain if the stock is at $30 in four months and the stock was purchased?
A) 9.54 percent loss
B) 95.45 percent loss
C) 0.9545 percent gain
D) 95.45 percent gain
E) 9.54 percent gain
Q2) A stock currently sells for $150 per share. A call option on the stock with an exercise price of $155 currently sells for $2.50. The call option is
A) at-the-money.
B) in-the-money.
C) out-of-the-money.
D) at breakeven.
E) above-the-money.
Q3) A cash or spot contract is an agreement for the immediate delivery of an asset, such as the purchase of stock on the NYSE.
A)True
B)False
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Chapter 15: Forward, Futures, and Swap Contracts
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148 Verified Questions
148 Flashcards
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Sample Questions
Q1) Refer to Exhibit 15.6. Assume that a month later the price of the September T-Bill future is 96.25 and the price of the Eurodollar future is 95.9. Calculate the profit on the Eurodollar futures position.
A) 101 basis points
B) 130 basis points
C) -101 basis points
D) -130 basis point.
E) 29 basis points
Q2) Refer to Exhibit 15.15. Assuming that three-month LIBOR is 5.00 percent on the rate determination day, and the contract specified settlement in advance, describe the transaction that occurs between the dealer and McIntire.
A) The dealer is obligated to pay McIntire $61,728.40.
B) The dealer is obligated to pay McIntire $56,389.16.
C) McIntire is obligated to pay the dealer $56,389.16.
D) McIntire is obligated to pay the dealer $61,728.40.
E) McIntire is obligated to pay the dealer $66,728.40.
Q3) The cost-of-carry model is useful for pricing future contracts.
A)True
B)False
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Page 21
Chapter 16: Option Contracts
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Sample Questions
Q1) Refer to Exhibit 16.1. If the spot rate at expiration is $0.90 and the call option was purchased, what is the dollar gain or loss?
A) $0
B) $3750 gain
C) $3660 gain
D) $4650 loss
E) $2680 loss
Q2) Refer to Exhibit 16.8. If you establish a long straddle using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $68.75 loss
B) $68.75 gain
C) $37.50 loss
D) $1,200.00 loss
E) $1,200.00 gain
Q3) The buyer of a straddle expects stock prices to move strongly in either direction. A)True B)False
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22
Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) Closed-end investment companies never sell at discounts to their NAV.
A)True
B)False
Q2) Which of the following is a characteristic of hedge funds?
A) They are generally less restricted in how and where they can make investments.
B) They are more liquid than mutual fund shares.
C) They have no limitations on when and how often investment capital can be contributed or removed.
D) They are more restricted in how and where they can make investments.
E) They are highly correlated with traditional asset class investments.
Q3) On January 1, 2017, you invest $20,000 in Libby Mutual Fund, a load fund that charges a fee of 2.5 percent. The fund's returns were 9 percent in 2017, 8 percent in 2018, and 3 percent in 2019. If you redeem all your shares on December 31, 2019, what is the dollar value?
A) $24,250.32
B) $24,000.32
C) $23,644.06
D) $23,195.17
E) $21,501.80
Page 23
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) What is the Sharpe measure for the S&P 500 over the last ten years if the standard deviation was 8 percent and the return was 14 percent?
A) 1.55
B) 1.69
C) 1.75
D) 1.99
E) 2.09
Q2) Refer to Exhibit 18.8. Compute the Jensen Measure for the C fund.
A) 0.16 percent
B) 1.80 percent
C) 7.20 percent
D) 9.00 percent
E) 9.13 percent
Q3) The portfolio performance measure that can be most affected by a benchmark error is the Sharpe measure.
A)True
B)False
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