Investment Strategies - Review Questions 17 - 22

  1. With respect to the binomial option pricing and Black-Scholes option valuation models,
    1. Both represent alternative methods of valuing any option contract.
    2. Whereas the binomial model lends itself to the valuation of American style options, Black-Scholes is better suited to the pricing of European style options.
    3. These are factor models similar to APT.
    4. None of the foregoing.
  2. Factors which impact the pricing of options include all of the following, EXCEPT:
    1. Volatility.
    2. The Treasury rate on the two year note.
    3. The underlying stock price.
    4. The strike price.
    5. The time to expiration.
  3. All of the following are features of the Black-Scholes model, except:
    1. European style option.
    2. No dividends.
    3. Known and constant risk-free rate.
    4. Discrete time pricing model.
    5. Known and constant volatility.
  4. Arbitrage Pricing Theory may best be described as:
    1. An econometric forecasting model.
    2. A multifactor model used to price equities.
    3. A pricing model depicted in the Security Market Line.
    4. None of the above.
  5. The Security Market Line:
    1. Is the linear expression of a multifactor model.
    2. Calculates the risk-adjusted performance of an individual security.
    3. Plots the inputs of the Capital Asset Pricing Model.
    4. All of the foregoing.
  6. Call options on ΠΧΞ Corporation with seven months to expiry have a strike price of 17. The share price has been erratic and currently trades at approximately $25.58. From the foregoing, one would infer that:
    1. The option on ΠΧΞ is an inexpensive means of gaining exposure to the actual stock.
    2. Investors would pay a large premium for this option.
    3. The $11 premium for this option reflects time value only.
    4. The $11 premium for this option reflects intrinsic value only.
    5. a & b.
Review Questions 23 - 27
Related Articles
  1. Career Education & Resources

    The Top RIA Deals of 2015

    It was a big year for change within the RIA industry. Here are 2015's biggest mergers, acquisitions and buyouts.
  2. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  3. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  4. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  5. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  6. Saving and Spending

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  7. Mutual Funds & ETFs

    Fidelity Target Risk Funds Overview

    Get a brief overview of Fidelity's seven target risk funds, with a description of each fund's asset allocation and expense ratio.
  8. Investing News

    Is it the Right Time to Raise Interest Rates?

    Warning signs have started to emerge that point to a potentially dismal 2016 for the U.S. economy.
  9. Markets

    Four Big Risks of Algorithmic High-Frequency Trading

    Algorithmic HFT has a number of risks, and it also can amplify systemic risk because of its propensity to intensify market volatility.
  10. Mutual Funds & ETFs

    The Top 3 Invesco Funds for Retirement Diversification in 2016

    Explore analyses of the top three Invesco mutual funds for retirement diversification in 2016, and learn about the characteristics of these target-date funds.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center