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3.6 Computer quiz

  1. By combining anti-correlated securities, a portfolio becomes
    1. more risky
    2. more predictable
    3. more profitable

  2. No arbitrage arguments state that
    1. arbitrage can never exceed the risk free interest rate
    2. arbitrageurs immediately seize opportunities for making risk-free profits
    3. without using arbitrage opportunities, a portfolio grows at the risk-free rate

  3. Which of the following random variables are martingales? $ ^\spadesuit$
    1. betting on ``heads'' when you flip a coin
    2. the value of a share
    3. the daily price increment to the value of a share in a mature company
    4. the daily increment to the short term interest rate
    5. playing Russian roulette

  4. A discrete rather than continuous delta-hedging of the portfolio $ ^\spadesuit$
    1. reduces the expected return of the portfolio
    2. increases the expected return of the portfolio
    3. increases the amount of risk in the portfolio

  5. A negative market price of risk $ \lambda$ signifies that $ ^\spadesuit$
    1. the underlying is cheap, signalling a good buying opportunity
    2. the stock market is more volatile than the bond market
    3. the bond market will outperform the stock market
    4. the investors expect the underlying to under perform the spot rate

  6. The coefficients ($ \sigma$ , $ r$ , etc) in the Black-Scholes and Vasicek equations $ ^\spadesuit$
    1. have been assumed constant
    2. can be arbitrary deterministic functions of time and the stochastic variable
    3. can be arbitrary stochastic functions

SYLLABUS  Previous: 3.5 Hedging a bond  Up: 3 FORECASTING WITH UNCERTAINTY  Next: 3.7 Exercises

      
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