Risk Management and Derivatives
Final Test Solutions
Course Introduction
This course provides a comprehensive introduction to risk management concepts and the use of derivative instruments in mitigating financial risk. Topics include the identification, measurement, and control of various types of financial risks faced by corporations and financial institutions, such as market, credit, and operational risks. The course covers the characteristics, pricing, and application of derivative products including forwards, futures, options, and swaps. Emphasis is placed on strategies for hedging and speculation, valuation techniques, regulatory considerations, and the role of derivatives in portfolio and risk management. Practical case studies and real-life examples are used to illustrate the integration of derivatives into overall risk management frameworks.
Recommended Textbook
Modern Portfolio Theory and Investment Analysis 9th Edition by Edwin J. Elton
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5 Chapters
231 Verified Questions
231 Flashcards
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Page 2
Chapter 1: Introduction
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12 Verified Questions
12 Flashcards
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Sample Questions
Q1) Collateralized debt obligations (CBO)are backed by one of the following:
A) Pools of mortgages
B) Low Investment-grade corporate bonds
C) Pools of commercial or personal loans
Answer: B
Q2) In case of government bonds,non-competitive bidders have price uncertainty and competitive bidders face volume uncertainty.
A)True
B)False
Answer: True
Q3) Which of the following security's value is contingent on the performance of an underlying security?
A) Treasury Bill
B) Option
C) Corporate Bond
D) Equity
Answer: B
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Chapter 2: Portfolio Analysis
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36 Verified Questions
36 Flashcards
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Sample Questions
Q1) Using the Sharpe single-index model with a random portfolio of U.S.common stocks,as one increases the number of stocks in the portfolio,the total risk of the portfolio will:
A) approach zero.
B) approach the portfolio's systematic risk.
C) approach the portfolio's non-systematic risk.
D) not be affected.
Answer: B
Q2) What is the concept behind the indexes used in the Fama and French Model?
A) Form portfolios with standard deviations that mimic the impact of the variables.
B) Form portfolios with returns that are opposite to the impact of the variables.
C) Form portfolios with returns that mimic the impact of the variables.
D) Form portfolios with standard deviations that are opposite to the impact of the variables.
Answer: C
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Chapter 3: Models of Equilibrium in the Capital Markets
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46 Verified Questions
46 Flashcards
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Sample Questions
Q1) What would be the expected return and standard deviation of a portfolio with equal proportions invested in Treasury bills and the market portfolio?
A) 7.5%, 8%
B) 10%, 8%
C) 10%, 16%
D) 25%, 32%
Answer: B
Q2) Which statement of the following statements is true?
A) In equilibrium, every security and combination of securities lies on the Capital Market Line.
B) In equilibrium, every security and combination of securities lies on the Security Market Line.
C) Only efficient portfolios lie on the Security Market Line.
D) In equilibrium, every security and combination of securities lies lower than the Capital Market Line.
Answer: B
Q3) Which of A and B has the least total risk? Which of A and B has the least systematic risk?
Answer: A has least total risk; B has least systematic risk
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Page 5
Chapter 4: Security Analysis and Portfolio Theory
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125 Verified Questions
125 Flashcards
Source URL: https://quizplus.com/quiz/69297
Sample Questions
Q1) Consider the purchase of a put option with an exercise price of $40 and a cost of $5 and the purchase of a call option with the same expiration date and on the same stock with an exercise price of $45 and a cost of $6.Graph the profit of this combination.Be sure to label all points.
Q2) Assume bond returns are given by a single-index model where the index is the percentage change in 1 plus the interest rate.
a. What is the appropriate measure of how bond returns are affected by the index?
b. If the above model is used as a return-generating process, what is the corresponding APT model?
Q3) The duration of a bond decreases as the coupon rate on the bond increases.
A)True
B)False
Q4) Discuss whether the following statement is true or false:
The use of a dividend-discount model to value common stocks is inconsistent with strong-form efficiency but is consistent with weak-form efficiency.
A)True
B)False
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Chapter 5: Evaluating the Investment Process
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12 Verified Questions
12 Flashcards
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Sample Questions
Q1) Mutual funds are subject to a single set of tax rules.To avoid taxes,mutual funds must distribute by December 31<sup>st</sup> 98% of all ordinary income earned during the calendar year and 98% of all realized net capital gains earned during the previous 12 months ending October 31<sup>st</sup>.
A)True
B)False
Q2) A perfect forecasting ability implies that:
A) the predicted change in earnings are higher than the realized change in earnings. B) the forecaster outperforms the naive no-change model.
C) the value of Thiel's inequality coefficient will be more than 1.
D) the predicted change in earnings equals difference between actual earnings and forecasted level of earnings.
Q3) Explain how Betas of Index funds result below one under a passive strategy.
Q4) Explain how a fund manager may improve the portfolio's performance through market timing.Also discuss the limitation of using such strategies.
Q5) Past fund performance is correlated with future fund performance,such as,poor fund performance predicts future poor performance.
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Page 7