Chapter 3 Practice Questions
1. On a particular day, the exchange rate of the U.S. dollar and the Albanian lek (L) is 125 L/USD. What is the exchange rate quoted in American terms?
A. 0.0080 USD/L
B. 0.0375 L/USD
C. 0.0125 USD/L
D. It is already quoted in American terms
2. All foreign exchange futures contracts are quoted in:
A. American terms
B. European terms
C. The same terms in which the foreign currency is quoted in the spot market
D. American and European terms side by side
3. All of the following are true of systematic risk, except that systematic risk:
A. Is estimated for a particular stock by the stock’s beta
B. Is the risk that two correlated stocks will rise or fall in price at the same rate
C. Is the risk that the market as a whole will decline
D. Cannot be reduced by diversifying a portfolio
4. Diversifying a stock portfolio reduces:
I. Systematic risk
II. Unsystematic risk
A. I only
B. II only
C. Both I and II
D. Neither I nor II
5. You want to hedge your portfolio of stocks whose risks you measure against the market, defined for your purposes as the Russell 1000 stock index. What should be the beta of the Russell 1000?
A. 1.0
B. 0.5
C. 0.5
D. 1.0
6. The term “risk-free return” refers to the return on an investment _____.
A. Already realized
B. Associated with systematic risk
C. Expected on a Treasury bill
D. Associated with cost of carry, such as dividends or earned interest
7. The capital asset pricing model evaluates a stock index’s _____ in terms of _____.
A. Contract multiplier; contract size
B. Beta; tick size
C. Cost of carry; dividends
D. Expected return; risk
8. What is the contract size for single stock futures?
A. 20 shares
B. The stock’s current value times a contract multiplier
C. 100 shares
D. 1,000 shares
9. A spread consisting of long and short futures contracts