Q&A Hero

Q: The current stock price of Alcoa is $70, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoa's stock is 40%. You want to purchase a call option on this stock with an exercise price of $75 and an expiration date 30 days from now. Based on the Black-Scholes OPM, the call option's delta will be __________. A. .28 B. .31 C. .62 D. .70

Q: If a stock price increases, the price of a put option on the stock will __________ and the price of a call option on the stock will __________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

Q: A hedge ratio of .70 implies that a hedged portfolio should consist of ________. A. long .70 calls for each short stock B. long .70 shares for each long call C. long .70 shares for each short call D. short .70 calls for each long stock

Q: You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 basis points, your predicted new price for the bond (including convexity) is _________. A. $638.85 B. $642.54 C. $666.88 D. $705.03

Q: You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including convexity) is _________. A. $1,098.45 B. $1,104.56 C. $1,113.41 D. $1,124.22

Q: Convexity implies that duration predictions: I. Underestimate the percentage increase in bond price when the yield falls. II. Underestimate the percentage decrease in bond price when the yield rises. III. Overestimate the percentage increase in bond price when the yield falls. IV. Overestimate the percentage decrease in bond price when the yield rises. A. I and III only B. II and IV only C. I and IV only D. II and III only

Q: Advantages of cash flow matching and dedicated strategies include: I. Once the cash flows are matched, there is no need for rebalancing. II. Cash flow matching typically earns a higher rate of return than active bond portfolio management. III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable. A. I only B. II only C. I and III only D. I, II, and III

Q: Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because: I. The portfolio must be rebalanced every time interest rates change. II. The portfolio must be rebalanced over time even if interest rates don't change. III. Convexity implies duration-based immunization strategies don't work. A. I only B. I and II only C. II only D. I, II, and III

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: I. Interest rates increase. II. Interest rates stay the same. III. Interest rates fall. A. I only B. II only C. I and II only D. I, II, and III

Q: What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders? A. Cash flow matching B. Index tracking C. Yield pickup swaps D. Substitution swap

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. The answer cannot be determined from the information given.

Q: Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? A. Switch from low-duration to high-duration bonds. B. Switch from high-duration to low-duration bonds. C. Switch from high-grade to low-grade bonds. D. Switch from low-coupon to high-coupon bonds.

Q: A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event? A. Buy the 5-year bonds, and short the surrounding maturity bonds. B. Buy the 5-year bonds, and buy the surrounding maturity bonds. C. Short the 5-year bonds, and short the surrounding maturity bonds. D. Short the 5-year bonds, and buy the surrounding maturity bonds.

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. The answer cannot be determined from the information given.

Q: Building a zero-investment portfolio will always involve _____________. A. an unknown mixture of short and long positions B. only short positions C. only long positions D. equal investments in a short and a long position

Q: The possibility of arbitrage arises when ____________. A. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily B. mispricing among securities creates opportunities for riskless profits C. two identically risky securities carry the same expected returns D. investors do not diversify

Q: Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A. fairly priced B. overpriced C. underpriced D. none of these answers

Q: Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately _________. A. .1152 B. .1270 C. .1521 D. .1342

Q: Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A. 13.5% B. 15% C. 16.25% D. 23%

Q: Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A; A B. A; B C. B; A D. B; B

Q: Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A; A B. A; B C. B; A D. B; B

Q: In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? A. The capital market line always has a positive slope. B. The capital market line is also called the security market line. C. The capital market line is the best-attainable capital allocation line. D. The capital market line is the line from the risk-free rate through the market portfolio.

Q: According to the CAPM, which of the following is not a true statement regarding the market portfolio. A. All securities in the market portfolio are held in proportion to their market values. B. It includes all risky assets in the world, including human capital. C. It is always the minimum-variance portfolio on the efficient frontier. D. It lies on the efficient frontier.

Q: According to the capital asset pricing model, in equilibrium _________. A. all securities' returns must lie below the capital market line B. all securities' returns must lie on the security market line C. the slope of the security market line must be less than the market risk premium D. any security with a beta of 1 must have an excess return of zero

Q: The beta of a security is equal to _________. A. the covariance between the security and market returns divided by the variance of the market's returns B. the covariance between the security and market returns divided by the standard deviation of the market's returns C. the variance of the security's returns divided by the covariance between the security and market returns D. the variance of the security's returns divided by the variance of the market's returns

Q: In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________. A. automatically B. by adjusting the divisor C. by adjusting the numerator D. by adjusting the market value weights

Q: Which of the following does not approximate the performance of a buy-and-hold portfolio strategy? A. An equally weighted index B. A price-weighted index C. A value-weighted index D. All of these options (Weights are not a factor in this situation.)

Q: Preferred stock is like long-term debt in that ___________. A. it gives the holder voting power regarding the firm's management B. it promises to pay to its holder a fixed stream of income each year C. the preferred dividend is a tax-deductible expense for the firm D. in the event of bankruptcy preferred stock has equal status with debt

Q: Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______________. A. inflation is lower than anticipated over the investment period B. inflation is higher than anticipated over the investment period C. the U.S. dollar increases in value against the euro D. the spread between commercial paper and Treasury securities remains low

Q: The Dow Jones Industrial Average is _________. A. a price-weighted average B. a value weight and average C. an equally weighted average D. an unweighted average

Q: The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive _________. A. $1,024.75 B. $1,024.38 C. $1,023.75 D. $1,022.50

Q: TIPS are ______. A. Treasury bonds that pay no interest and are sold at a discount B. U.K. bonds that protect investors from default risk C. securities that trade on the Toronto stock index D. Treasury bonds that protect investors from inflation

Q: If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________. A. 99:25 B. 99:63 C. 99:20 D. 99:08

Q: An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____. A. 5% and 6.4% B. 5% and 5.44% C. 4.25% and 6.4% D. 5.75% and 5.44%

Q: Currently, the Dow Jones Industrial Average is computed by _________. A. adding the prices of 30 large "blue-chip" stocks and dividing by 30 B. calculating the total market value of the 30 firms in the index and dividing by 30 C. measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

Q: A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following? A. Reverse repurchase agreement B. Bankers' acceptance C. Commercial paper D. Repurchase agreement

Q: A concern facing product developers is the unlocked potential in developing markets or in Third-World countries. Elaborate on this statement.

Q: What are the various ways in which a product can be protected against product piracy?

Q: Explain the legal bases for negligence and warranty claim with respect to product liability.

Q: Describe with examples the various sources of injury that can cause product liability claims.

Q: Briefly trace the stages of the life cycle of a public concern.

Q: Managements educate company personnel about new products most likely through: A. implied warranties. B. corporate espionage. C. instructional advertising. D. scientific advisory panels.

Q: In _____, a manufacturer assumes all responsibility and is expected to pass along the costs somehow. A. monopolistic approach B. no-fault approach C. trade-off approach D. zero defects approach

Q: Even when a particular situation seems to have a clear-cut guiding principle, one often finds a contrary principle of equal merit and this is referred to as a(n) _____. A. trade-off problem B. legal recourse C. ethical lapse D. no-fault situation

Q: In the new products process, _____ often leads firms to explore the minds of customers to find something they want or will want when they hear about it. A. reverse engineering B. expected effects analysis C. concept generation D. prototyping

Q: According to the U.S. Trade Representation lists, the countries with the biggest piracy problem are currently: A. Germany and Korea. B. Britain and Canada. C. Mexico and Japan. D. China and Taiwan.

Q: Panaroma is a patented apparel brand. A manufacturer sells low quality apparel under a slightly different brand name "panoroma" that can cause confusion among customers. This scenario best illustrates _____. A. embezzlement B. brand cannibalization C. near brand usage D. defalcation

Q: _____ is best described as the unauthorized use of copyrighted or patented goods or brands. A. Defalcation B. Brand piracy C. Brand cannibalization D. Embezzlement

Q: 43. Which of the following is true of counterfeiting as a means to product piracy? A. Counterfeit goods range from low price and quality to excellent quality. B. It involves making defamatory statements about established product brands. C. It refers to a ban on copyrighted or patented goods or brands. D. Counterfeited products have the manufacturer's original warranty.

Q: During which of the following stages of the new products process are problem experts involved as players in the communications program? A. Development B. Concept generation C. Project evaluation D. Launch

Q: The best success in green product development occurs when a firm: A. aligns its business objectives with its environmental initiatives. B. uses raw materials that are scarce or hard to get. C. makes only incremental green improvements to its products. D. isolates environmentally-responsible business practices from achieving revenue objectives.

Q: A new product is said to harm the environment if its: A. raw materials are available in abundance. B. design is not compatible with breakthrough technology. C. production requires human capital. D. disposal problem cannot be handled by recycling.

Q: Which of the following is the biggest complaint against the laws governing product liability? A. They do not provide any defenses against product liability claims for manufacturers. B. They are based on assumption of risk. C. They always require buyers to prove that there was direct sale from the manufacturer. D. They have a negative impact upon a manufacturer's willingness to innovate.

Q: When pharmaceutical firms are reluctant to develop new products because of major risks of trouble, it is referred to as _____. A. causal ambiguity B. nonstandard risk C. drug lag D. medical eclipse

Q: Which of the following is the primary task of a recall program coordinator for defective products? A. Fighting strict liability claims on the firm's behalf B. Communicating with the media and regulatory bodies C. Writing complaint letters to political representatives D. Making financial arrangements to sustain the loss

Q: Which of the following statements is true of product recall? A. Safety risks and corrective action are avoided during the recall stage. B. Recall program coordinators should be cross-functional teams rather than individual members. C. Recall notices mailed to consumers should resemble junk mail to enable risk assessment. D. Final customers as well as intermediaries should be informed of the potential risks.

Q: A manufacturer is most likely to be held liable for injuries caused by a "perfect" product if the injury was the result of: A. misrepresentation. B. unforeseeable misuse. C. assumed risk. D. unintended use.

Q: The concept of _____ holds that a seller is responsible for keeping defective products off the market. A. inherent risk B. assumption of risk C. strict liability D. express warranty

Q: A firm charged with strict liability in an injury case may seek to defend on the basis of: A. misrepresentation of product. B. unforeseeable misuse. C. specialized legislation. D. inadequate materials.

Q: Janet uses the Atlas brand of lawnmowers despite being aware of its potential defects. She neglects the defects and continues to use the product regardless of its dangers. In this case, the manufacturer of Atlas lawnmowers can use _____ as a defense against any strict liability claims. A. assumption of risk B. misrepresentation C. warranty D. inherent risk

Q: Under the concept of strict liability, the: A. buyer is unjustified to depend on the seller being right. B. seller of an item is required to make an implied warranty rather than an express warranty. C. seller of an item has the responsibility for not putting a defective product on the market. D. buyer needs to prove that there was direct sale from the manufacturer.

Q: The degree of puffing a court will allow in business is most closely related to: A. express warranties. B. quasi contracts. C. negligent torts. D. strict liabilities.

Q: Simply offering a product for a given use is sufficient to create a(n): A. proof of negligence. B. misrepresentation liability. C. explicit warranty. D. implied warranty.

Q: Which of the following sources of product liability stems from a seller's promise that is unfulfilled? A. Misrepresentation B. Warranty C. Negligence D. Strict liability

Q: A(n) _____ is best described as any statement of fact made by a manufacturer about a product, whether made by salespeople, retailers, or others. A. implied warranty B. express warranty C. oblique warranty D. assumed warranty

Q: Under the doctrine of _____, injury claimants had to prove that there was direct sale of a defective product from the manufacturer to the injured. A. profitability B. portability C. privity D. possession

Q: With which of the following injury sources are inadequate quality techniques that may result in faulty product units, even if a product is well designed, most closely associated? A. Failure to provide adequate instructions B. Defects in manufacture C. Inherent risks D. Design defects

Q: With reference to product liabilities, injuries caused as a result of inadequate materials and absence of safety devices would fall under the category of _____. A. design defects B. inherent risks C. customer misuse D. dangers after use

Q: Courts are more likely to be understanding to manufacturers if a product injury was the result of a(n) _____. A. design defect B. manufacturing defect C. inadequate material D. inherent risk

Q: Which of the following is true of product liability? A. Products with inherent risks are excluded from product liability. B. Historically, it applied to goods and not to services. C. It is applicable in cases where there is an assumption of risk. D. It is particularly applied in cases of unforeseeable misuse.

Q: In terms of the seriousness of the potential suits and the costs of error, the most complex and frustrating problem that new product managers currently face is _____. A. reverse engineering B. product differentiation C. product liability D. mass customization

Q: The _____ is typically the last stage in the life cycle of a public concern that often lasts for years, and where general shifts in a country's political thinking may cause various issues to move into or out of the idle state. A. trial support phase B. regulatory adjustment phase C. political arena phase D. stirring phase

Q: Identify the correct statement about the political arena phase of the life cycle of a public concern. A. At this stage, the opportunity for defusing the public issue has already passed. B. At this stage, a champion decides to take on the public issue as a cause. C. It is characterized by a period of jockeying by the adversaries. D. It is characterized by tentative expressions of concern by knowledgeable authorities.

Q: Which of the following is true of the stirring phase of the life cycle of a public concern? A. It is characterized by a would-be leader and a muted cause seeking a political base. B. It typically occurs when the opportunity for defusing the public concern has usually passed. C. It is easy to identify this period, although most people ignore it. D. It is characterized by a period of jockeying by adversaries.

Q: With reference to the life cycle of a public concern, as public agitations over an issue increase, a champion may decide to take it on as a cause in the _____ phase of the cycle. A. stirring B. political arena C. regulatory adjustment D. trial support

Q: In the _____ of the life cycle of a public concern, individuals begin to sound off long before enough people have been injured or irritated to cause a general reaction. A. trial support phase B. stirring phase C. political arena phase D. regulatory adjustment phase

Q: Firms today manage the marketing and distribution process of products with the same vigor they manage design and manufacturing.

Q: Managements today demand tough standards, rigorous auditing at all points, good record keeping, and training of new product employees.

Q: The General Agreement on Tariffs and Trade (GATT) allows a nation to restrain imports from countries where piracy is a problem.

Q: In many foreign markets, especially developing economies, the laws governing intellectual property protection and product piracy are very stringent.