## Question about Quiz Feedback - PRM-I

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am

### Question about Quiz Feedback - PRM-I

I have few doubts about following 2 questions:
1. Separation Theorem suggests that:
Select one:
a. Portfolios held by conservative investors differ markedly from portfolios held by aggressive investors.
b. Investors, conservative or aggressive, will hold the same mix of stocks from the efficient set
c. All investors will hold the same mix of stocks from the efficient set and borrow or lend to attain their preferred risk class Incorrect
d. None of these

Now I answered C but it was marked wrong and explanation was:
The correct answer is D.
Separation Theorem suggests that "All investors will hold the same mix of stocks from the efficient set and borrow or lend to attain their preferred risk class".
The correct answer is: None of these.The correct answer is D.
Separation Theorem suggests that "All investors will hold the same mix of stocks from the efficient set and borrow or lend to attain their preferred risk class".
The correct answer is: None of these.

So I am confused as to which answer is correct. The explanation reproduces the point C and yet marks D as correct choice

2. A bank credit officer, who has reviewed a loan application, has made the following statement: “On a stand alone basis, I was not very keen on granting this loan however, I granted this loan after looking at the overall asset portfolio of the bank.” Based on the above statement, which of the following is true.
Select one:
a. The correlation of the newly granted loan with the overall portfolio is low and therefore the credit officer was right in granting the loan. Incorrect
b. The correlation of the newly granted loan with the overall portfolio is low and therefore the credit officer was wrong in granting the loan.
c. The correlation of the newly granted loan with the overall portfolio is high and therefore the credit officer was right in granting the loan.
d. The correlation of the newly granted loan with the overall portfolio is high and therefore the credit officer was wrong in granting the loan.

Feedback
The correct answer is B.
The risk of a loan at the portfolio level is guided by both its systematic risk and unsystematic risk. Therefore low correlation of the new loan with the overall existing portfolio make it better investment decision due to diversifications benefits. Therefore, the credit officer was right in his reasoning.
The correct answer is: The correlation of the newly granted loan with the overall portfolio is low and therefore the credit officer was wrong in granting the loan..

Here again the correct answer seems to be A as per the explanation given yet choice B is taken as correct.

edupristine
Finance Junkie
Posts: 944
Joined: Wed Apr 09, 2014 6:28 am

### Question about Quiz Feedback - PRM-I

Hi, your query has been resolved. correct answer for your first query question is "All investors will hold the same mix of stocks from the efficient set and borrow or lend to attain their preferred risk class" and correct answer for the second query is "The correlation of the newly granted loan with the overall portfolio is low and therefore the credit officer was right in granting the loan."

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am
Also there is a problem with following question:

True or False?
Value of the firm is minimum, when overall cost of capital is maximum
Select one:
a. True Incorrect
b. False
The feedback is

Feedback

The correct answer is B.
Value of the firm will be maximum, when the overall cost of capital (WACC) is minimum.
The correct answer is: False.

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am
One more issue

The holder of a put will realize a profit upon exercise of the option if the price of the underlying asset:
Select one:
a. Falls below the exercise price
b. Falls below the exercise price plus the premium paid
c. Falls below the exercise price minus the premium paid Incorrect

Feedback is

The correct answer is B.
Put option gives the holder the right to sell the underlying asset at the exercise price. The buyer has to pay a premium for this right. So, if the price of the underlying asset falls below the exercise price minus premium, the buyer will realize a profit.
The correct answer is: Falls below the exercise price plus the premium paid.

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am
Suppose you believe that Company A's stock price is going to decline from its current level of \$82.50 during the next 5 months. For \$510.25, you could buy a 5-month put option giving you the right to sell 100 shares at a price of \$83.00 per share. If you bought the put option contract for \$510.25 and Company A's stock price actually dropped to \$63.00, your profit net of the premium paid would be? Choose one answer.
Select one:
a. \$1,950
b. \$1,439.75
c. \$1,489.75 Incorrect
d. \$2,000
Feedback
The correct answer is B
\$1,489.75
You would make \$83 - \$63 = \$20 per share, for a total gross profit of 100 × \$20 = \$2,000. Your net profit would be reduced by transaction costs, therefore you would net \$2,000 - \$510.25 = \$1,489.75.
The correct answer is:
\$1,439.75

Pl check why this is happening

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am
Which of the following is least likely to be true?
Select one:
a. The desirability of writing a covered call to enhance income depends upon the chance that the stock price will exceed the exercise price at which the trader writes the call.
b. A covered call is an investment management technique designed to protect a stock from a decline in value
c. When an investor feels the stock’s price will not go up any time soon, and he wants to increase his income by collecting the call option premium, he will write a covered call. Incorrect
Feedback
The correct answer is B.
A covered call is an investment management technique designed to protect a stock from a decline in value. A protective put is an investment management technique designed to protect a stock from a decline in value.
The correct answer is: A covered call is an investment management technique designed to protect a stock from a decline in value.

As per my understanding covered call is used whenever investor has a view that there will be quiet period in market and not as a protective strategy. Therefore pl explain the answer

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am
Following question and its feedback are confusing:

Which of the following is true about option strategies?
Select one or more:
a. Bull spread involves selling a call option on a stock with a certain stock price and buying a call option on the same stock with a higher strike price
b. Bear spread involves selling a put option on a stock with a certain stock price and buying a put option on the same stock with a higher strike price Correct
c. Both A and B
d. None of these
Feedback
The correct answer is Solution: Bull spread involves buying a call option with a certain strike price and selling a call option on the same stock with a higher strike price. – B. Bear spread involves selling a put option on a stock with a certain stock price and buying a put option on the same stock with a higher strike price.
The correct answer is: Bull spread involves selling a call option on a stock with a certain stock price and buying a call option on the same stock with a higher strike price, Bear spread involves selling a put option on a stock with a certain stock price and buying a put option on the same stock with a higher strike price, Both A and B, None of these.

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am
An investor expects the stock price to decrease and wants to limit his/her downside risk while agreeing to get a limited upside potential. Which of the following four strategies should he/she choose? (Ch 10 Strategies)
Select one:
a. A long position in a put option with strike price K1 and short position in a call option with strike price K2 (K2 >K1). Incorrect
b. A long position in a put option with strike price K1 and a long position in another put option on the same stock with strike Price K2 (K2 > K1).
c. A long position in a put option with strike price K1 and a short position in another put option on the same stock with strike Price K2 (K2 > K1).
d. A long position in a put option with strike price K1 and a short position in another put option on the same stock with strike Price K2 (K2 < K1).
Feedback
The correct answer is D
The correct answer is: A long position in a put option with strike price K1 and a short position in another put option on the same stock with strike Price K2 (K2 < K1)..

I think option a is correct answer. The answer provided in feedback will protect fall is portfolio to the extent of k1-k2 only and upside will be unlimited. But question has asked for protection of downside by sacrificing upside.

edupristine
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Posts: 944
Joined: Wed Apr 09, 2014 6:28 am

### Question about Quiz Feedback - PRM-I

Hi, answer to your query in "True or False? Value of the firm is minimum, when overall cost of capital is maximum...." is that question is correct. Answer should be false because it is widely said "Value of the firm will be maximum, when the overall cost of capital (WACC) is minimum." There is no as such significance available that the value of the firm is minimum, when overall cost of capital is maximum.

edupristine
Finance Junkie
Posts: 944
Joined: Wed Apr 09, 2014 6:28 am

### Question about Quiz Feedback - PRM-I

Hi, in your query question: The holder of a put will realize a profit upon exercise of the option if the price of the underlying asset:
Select one:
a. Falls below the exercise price
b. Falls below the exercise price plus the premium paid
c. Falls below the exercise price minus the premium paid

The correct answer is C option. Your query has been resolved.