Chapter 1.

Introduction

TEST BANK
Chapter One
Introduction
Multiple Choice
1. The Orange County, California bankruptcy was largely due to the Treasurers use of
a. derivatives.
b. Mortgage-backed securities.
c. repurchase agreements.
d. zero coupon bonds.
ANSWER: C
2. All of the following are true regarding futures contracts except
a. they are marked to market.
b. they require payment of a performance bond.
c. they are a legally enforceable promise.
d. they are regulated by the SEC.
ANSWER: D
3. A security giving you the right to sell is a
a. put option.
b. call option.
c. short futures contract.
d. long futures contract.
ANSWER: A
4. A forward contract is most similar to a
a. futures contract.
b. call option.
c. put option.
d. debt security.
ANSWER: A
5. A person who combines derivatives with a business risk is a __________.
a. speculator
b. hedger
c. spreader
d. trader
ANSWER: B

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Chapter 1. Introduction
6. Which of the following is not a principal category of derivative asset?
a. options
b. futures
c. straddles
d. swaps
ANSWER: C
7. Finance is sometimes called
a. the study of arbitrage.
b. applied accounting.
c. behavioral economics.
d. mathematical science.
ANSWER: A
8. Derivative use includes all of the following except
a. income generation.
b. long-term capital appreciation.
c. speculation.
d. risk management.
ANSWER: B
9. Writing an option refers to
a. the establishment of a new position.
b. the sale of an existing position.
c. the creation and sale of a position.
d. the purchase of an existing position.
ANSWER: C
10. Futures contracts trade on all of the following except ___________.
a. silver
b. the weather
c. live cattle
d. land
ANSWER: D

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Chapter 1. Introduction

Statistical Appendix
Multiple Choice
1. An observation whose value changes is
a. a random variable.
b. discrete.
c. continuous.
d. a statistic.
ANSWER: A
2. A population with well-known characteristics is a __________.
a. statistic
b. sample
c. distribution
d. sample statistic
ANSWER: C
3. All of the following are measures of central tendency except _________.
a. mean
b. standard deviation
c. mode
d. median
ANSWER: B
4. The square of the standard deviation is the ___________.
a. variance
b. sigma
c. mode
d. skewness
ANSWER: A
5. About __% of the area under a normal distribution lies within two standard deviations of the
mean.
a. 65%
b. 75%
c. 85%
d. 95%
ANSWER: D
6. Volatility is most closely associated with
a. the median.
b. the central limit theorem.
c. dispersion.
d. central tendency.
ANSWER: C
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Chapter 1. Introduction
7. A distribution showing skewness is
a. not symmetric.
b. normal.
c. uniform.
d. triangular.
ANSWER: A
8. A standard normal distribution has
a. a mean of zero.
b. a mean of one.
c. a mean equal to the standard deviation.
d. a mean equal to the variance.
ANSWER: A
9. Two variables are independent if
a. they come from different distributions.
b. their correlation coefficient is negative.
c. their correlation coefficient is positive.
d. their correlation coefficient is zero.
ANSWER: D
10. Which of the following is true?
a. The correlation coefficient is always positive.
b. The absolute value of the correlation coefficient is always less than one.
c. Independent variables have a correlation coefficient not statistically different from zero.
d. Correlated variables are usually inversely related.
ANSWER:C

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