Question 1

If A and B are two disjoint sets, and "Pr" represents the probability, then Pr[A and B] will be:

Accepted Answer

A) negative. 
B) infinity. 
C) unity. 
D) zero. 
A) negative. 
B) infinity. 
C) unity. 
D) zero.

Question 2

A derivative is any financial instrument whose value depends on the:

Accepted Answer

A) extent of asset diversification. 
B) expected rate of inflation. 
C) purchasing power of the people. 
D) value of an underlying asset. 
A) extent of asset diversification. 
B) expected rate of inflation. 
C) purchasing power of the people. 
D) value of an underlying asset.

Question 3

Jeff holds $50,000 wealth which has a utility of 7.07 utils (assuming utility is the square root of wealth in thousand dollars).He considers investing this in a gamble which has a 0.6 probability of increasing his total wealth to $100,000 and 0.4 probability of decreasing it to $30,000.What will be Jeff's expected utility from the gamble?

Accepted Answer

A) 15 utils 
B) 8.19 utils 
C) 3.2 utils 
D) 12.12 utils 
A) 15 utils 
B) 8.19 utils 
C) 3.2 utils 
D) 12.12 utils

Question 4

Diversification of a portfolio leads to:

Accepted Answer

A) a negative correlation between the investments. 
B) a lower mean of returns. 
C) a lower variance of returns. 
D) a higher standard deviation of returns. 
A) a negative correlation between the investments. 
B) a lower mean of returns. 
C) a lower variance of returns. 
D) a higher standard deviation of returns.

Question 5

Two events A and B in a sample space are considered _____ if the probability that A will happen is the same regardless of whether or not B has happened.

Accepted Answer

A) conditional 
B) correlated 
C) independent 
D) exclusive 
A) conditional 
B) correlated 
C) independent 
D) exclusive

Question 6

The variance of a distribution increases more than proportionately with the spread of the distribution because:

Accepted Answer

A) variance is a squared quantity. 
B) variance always lies at the center of the distribution. 
C) variance is half the value of mean. 
D) variance is closer to the maximum values. 
A) variance is a squared quantity. 
B) variance always lies at the center of the distribution. 
C) variance is half the value of mean. 
D) variance is closer to the maximum values.

Question 7

Why are interest rates adjusted for inflation?

Accepted Answer

Interest is not the "price of money" but

Question 8

The present value of $200 to be received after 5years at 10 percent interest is $112.2.

Accepted Answer

A) True 
 B)False

Question 9

A loan used as an investment turns out to be profitable if the sale price of its output covers the _____ of all other inputs and interest on the funds loaned.

Accepted Answer

A) internal costs 
B) marginal cost 
C) opportunity cost 
D) average cost 
A) internal costs 
B) marginal cost 
C) opportunity cost 
D) average cost

Question 10

Why are present value calculations used in real options?

Accepted Answer

Real options involve decisions

Question 11

A probability distribution with a smaller percentage of its observations beyond a certain distance from the mean will have a higher variance.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following properties can be associated with an indifference curve of a risk-averse investor?

Accepted Answer

A) Indifference curve for a risk-averse investor is a vertical line parallel to the variance axis. 
B) Two indifference curves can intersect at the equilibrium combination of risk and return. 
C) An indifference curve closer to the expected return axis gives a better utility than the one farther away. 
D) Indifference curve for a risk-averse investor is always downward sloping. 
A) Indifference curve for a risk-averse investor is a vertical line parallel to the variance axis. 
B) Two indifference curves can intersect at the equilibrium combination of risk and return. 
C) An indifference curve closer to the expected return axis gives a better utility than the one farther away. 
D) Indifference curve for a risk-averse investor is always downward sloping.

Question 13

If the market price of an option just before its expiration is $33 while its strike price is $29, arbitrage will determine a price for it that:

Accepted Answer

A) leaves an investor indifferent between buying the stock outright or buying an option and then exercising it. 
B) encourages the investor to buy the stock outright and sell it when the option expires. 
C) encourages the investor to buy an option and exercise it only after its expiration. 
D) encourages the investor to buy the stock outright and rewrite an option later. 
A) leaves an investor indifferent between buying the stock outright or buying an option and then exercising it. 
B) encourages the investor to buy the stock outright and sell it when the option expires. 
C) encourages the investor to buy an option and exercise it only after its expiration. 
D) encourages the investor to buy the stock outright and rewrite an option later.

Question 14

Which of the following is a characteristic of a real option?

Accepted Answer

A) The call option on a stock exercised if some average of the prices of its components passes a critical level. 
B) The right to postpone construction on the basis of net present value calculation. 
C) The put option on a stock that need to be paid for (at a predetermined price) if they are actually exercised. 
D) The right to sell an option at the strike price. 
A) The call option on a stock exercised if some average of the prices of its components passes a critical level. 
B) The right to postpone construction on the basis of net present value calculation. 
C) The put option on a stock that need to be paid for (at a predetermined price) if they are actually exercised. 
D) The right to sell an option at the strike price.

Question 15

The longer the annuity on a sum of money the lower will be its present value.

Accepted Answer

A) True 
 B)False

Question 16

The value of a real option varies with all of the following, EXCEPT:

Accepted Answer

A) the range of outcomes. 
B) the rate of interest. 
C) the rate of unemployment. 
D) the delay in resolving uncertainty. 
A) the range of outcomes. 
B) the rate of interest. 
C) the rate of unemployment. 
D) the delay in resolving uncertainty.

Question 17

Explain graphically how the prices of a call and a put option calculated from the Black-Scholes formula vary with the price of an underlying stock.

Accepted Answer

According to the Black-Scholes formula,

Question 18

The _____ measures the degree of association between two independent variables in an a distribution.

Accepted Answer

A) expectation 
B) standard deviation 
C) correlation coefficient 
D) variance 
A) expectation 
B) standard deviation 
C) correlation coefficient 
D) variance

Question 19

If two investments, X and Y, have the same expected return an individual investor would prefer:

Accepted Answer

A) the one with a higher standard deviation. 
B) the one with a higher mean. 
C) the one with a lower correlation coefficient. 
D) the one with a lower variance. 
A) the one with a higher standard deviation. 
B) the one with a higher mean. 
C) the one with a lower correlation coefficient. 
D) the one with a lower variance.

Question 20

Unanticipated increase in inflation transfers wealth from the borrower, who pays the pre-decided rate of interest to the lender.

Accepted Answer

A) True 
 B)False

If A and B are two disjoint sets, and "Pr" represents the probability, then Pr[A and B] will be:

A derivative is any financial instrument whose value depends on the:

Diversification of a portfolio leads to:

Two events A and B in a sample space are considered _____ if the probability that A will happen is the same regardless of whether or not B has happened.

The variance of a distribution increases more than proportionately with the spread of the distribution because:

Why are interest rates adjusted for inflation?

The present value of $200 to be received after 5years at 10 percent interest is $112.2.

A loan used as an investment turns out to be profitable if the sale price of its output covers the _____ of all other inputs and interest on the funds loaned.

Why are present value calculations used in real options?

A probability distribution with a smaller percentage of its observations beyond a certain distance from the mean will have a higher variance.

Which of the following properties can be associated with an indifference curve of a risk-averse investor?

If the market price of an option just before its expiration is $33 while its strike price is $29, arbitrage will determine a price for it that:

Which of the following is a characteristic of a real option?

The longer the annuity on a sum of money the lower will be its present value.

The value of a real option varies with all of the following, EXCEPT:

Explain graphically how the prices of a call and a put option calculated from the Black-Scholes formula vary with the price of an underlying stock.

The _____ measures the degree of association between two independent variables in an a distribution.

If two investments, X and Y, have the same expected return an individual investor would prefer:

Unanticipated increase in inflation transfers wealth from the borrower, who pays the pre-decided rate of interest to the lender.

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

The Economics of Contracts

Risk and Information in Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Conflict, Negotiation and Group Choice

Filters

Exam 16: Time, Risk and Options

If A and B are two disjoint sets, and "Pr" represents the probability, then Pr[A and B] will be:

A derivative is any financial instrument whose value depends on the:

Diversification of a portfolio leads to:

Two events A and B in a sample space are considered _____ if the probability that A will happen is the same regardless of whether or not B has happened.

The variance of a distribution increases more than proportionately with the spread of the distribution because:

Why are interest rates adjusted for inflation?

The present value of $200 to be received after 5years at 10 percent interest is $112.2.

A loan used as an investment turns out to be profitable if the sale price of its output covers the _____ of all other inputs and interest on the funds loaned.

Why are present value calculations used in real options?

A probability distribution with a smaller percentage of its observations beyond a certain distance from the mean will have a higher variance.

Which of the following properties can be associated with an indifference curve of a risk-averse investor?

If the market price of an option just before its expiration is $33 while its strike price is $29, arbitrage will determine a price for it that:

Which of the following is a characteristic of a real option?

The longer the annuity on a sum of money the lower will be its present value.

The value of a real option varies with all of the following, EXCEPT:

Explain graphically how the prices of a call and a put option calculated from the Black-Scholes formula vary with the price of an underlying stock.

The _____ measures the degree of association between two independent variables in an a distribution.

If two investments, X and Y, have the same expected return an individual investor would prefer:

Unanticipated increase in inflation transfers wealth from the borrower, who pays the pre-decided rate of interest to the lender.

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

The Economics of Contracts

Risk and Information in Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Conflict, Negotiation and Group Choice

Filters