Investment Strategies - Review Answers

  1. "B". the short sale must be executed on a plus-tick.
  2. "C". investment-grade corporate bonds as they generate income which would be tax-deferred.
  3. "B". DRIP plans entail the purchase of dividend paying stocks and little else.
  4. "B". All of the other statements describe the risks of leverage.
  5. "D". Ease of replication speaks to the heart of passive investing.
  6. "C". The reason is due to transaction costs associated with the strategy.
  7. "B". Asset drift could significantly skew the portfolio's risk profile both positively and negatively.
  8. "C". A zero-cost collar satisfies these requirements.
  9. "C".
  10. "B". This is the greatest risk associated with short selling.
  11. "B".
  12. "D". Such tactical shifts are designed to exploit fleeting opportunities, but may generate additional risks.
  13. "D". all of the statements describe risks associated with rebalancing.
  14. "D". An exchange traded fund is not a strategy for dealing with low basis stock. An exchange fund is.
  15. "C". A tax-deferred retirement account is not an investment strategy but a tax-advantaged vehicle in which one may invest.
  16. "D". Both statements describe basic risks of concentration in low basis stock.
  17. "A".
  18. "B". All of the other statements describe the determinants of an option's price. T-bills would be the risk-free rate.
  19. "D". Black-Scholes is a continuous time pricing model.
  20. "B". This is a simple definition of APT.
  21. "B". SML and CML differ in that the former uses standard deviation as the risk measure; the latter uses Beta.
  22. "E". Ceteris paribus, a deep in-the-money option on a high price and volatile stock would be more expensive than if some or all of these conditions did not exist. The $11 premium represents intrinsic and time value as follows. Intrinsic value:25.58-7=8.58; Time value:11.00-8.58=2.42.
  23. "B". This is a rudimentary definition of binomial options pricing.
  24. "F". All of the items are acceptable uses of options.
  25. "D". Options close to expiration are worth less. Though b. and c. do not specify strike prices, the statements imply out of the money options which would carry lower prices.
  26. "B". This is the definition of a European option. An American style option permits exercise at any time before expiration. An Asian style option is one whose value and payoff are a function of the underlying over a specific time period. Contango is a term relating to futures markets where the futures price exceeds the spot price.
  27. "E". The question does not specify prices, but one can infer what they are in relation to one another based upon time left to expiration and the degree to which they are in or out of the money.
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