Free Exam I: Finance Theory, Financial Instruments, Financial Markets – 2015 Edition Exam 8006 Exam Practice Test

Which of the following assumptions underlie the 'square root of time' rule used for computing volatility estimates over different time horizons?1. asset returns are independent and identically distributed (i.i.d.)II. volatility is constant over timeIII. no serial correlation in the forward projection of volatilityIV. negative serial correlations exist in the time series of returns

• I and II
• I and III
• III and IV
• I, II and III

Which of the following is one of the basic axioms on which the principle of maximum expected utility is based:

• Stochastic dominance
• Transportation of choice
• Utility maximization
• Cognitive bias

Security A and B both have expected returns of 10%, but the standard deviation of Security A is 10% while that of security B is 20%. Borrowings are not permitted. A portfolio manager who wishes to maximize his probability of earning a 25% return during the year should invest in:

• Security A
• 50% in Security A and 50% in Security B
• Security B
• None of the above

Determine the price of a 3 year bond paying a 5% coupon. The 1,2 and 3 year spot rates are 5%, 6% and 7% respectively. Assume a face value of $100.

• $ 94.92
• $ 106.00
• $ 100.00
• $93.92

For a stock that does not pay dividends, which of the following represents the delta of a futures contract?

• 0
• e^(rt)
• 1
• Futures contracts do not have a delta as they are not options

A currency with a lower interest rate will trade:

• at a forward discount
• at a forward premium
• at the same prices for forwards as for the spots
• cannot be determined solely on the basis of interest rates

Which of the following reflects the pricing convention for currency forwards, where one of the currencies is USD?

• Forward forex prices are always quoted as the number of units of the foreign currency that one US dollar can buy
• It can be quoted either way, based on whether the contract is for a short maturity or long
• Forward forex prices are always quoted as the number of US dollars one unit of the foreign currency can buy
• It depends upon the currency - futures forex prices follow the same convention as for spot prices

Which of the following is not a relevant consideration for a trader desirous of delta hedging his or her options portfolio?

• Rebalancing frequency
• Cost per trade
• Volatility of the underlying
• Bid-offer spreads on the underlying

What is the standard deviation (in dollars) of a portfolio worth $10,000, of which $4,000 is invested in Stock A, with an expected return of 10% and standard deviation of 20%; and the rest in Stock B, with an expected return of 12% and a standard deviation of 25%. The correlation between the two stocks is 0.6.

• $2,081
• $1,201
• $1,204
• $4,330,000

Suppose the S&P is trading at a level of 1000. Using continuously compounded rates, calculate the futures price for a contract expiring in three months, assuming expected dividends to be 2% and the interest rate for futures funding to be 5% (both rates expressed as continuously compounded rates)

• $1,007.50
• $1,000.00
• $1,007.53
• $1,012.58