For the following tasks, select the correct answer.

a) When comparing investments with different horizons, the ____________ provides the more accurate comparison. Choose the correct answer.

A. arithmetic average

B. effective annual rate

C. average annual return

D. historical annual average

b) Which of the following statements is(are) true?

I) Risk-averse investors reject investments that are fair games.

II) Risk-neutral investors judge risky investments only by the expected returns.

III) Risk-averse investors judge investments only by their riskiness.

IV) Risk-loving investors will not engage in fair games.

A. I only

B. II only

C. I and II only

D. II and III only

E. II, III, and IV only

c) A hedge ratio for a call option is ________, and a hedge ratio for a put option is ______.

A. negative; positive

B. negative; negative

C. positive; negative

D. positive; positive

E. zero; zero

d) A futures contract

A. is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract.

B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.

C. gives the buyer the right, but not the obligation, to buy an asset sometime in the future.

D. is a contract to be signed in the future by the buyer and the seller of the commodity.

E. None of the options are correct.

e) If a stock index futures contract is overpriced, you would exploit this situation by

A. selling both the stock index futures and the stocks in the index.

B. selling the stock index futures and simultaneously buying the stocks in the index.

C. buying both the stock index futures and the stocks in the index.

D. buying the stock index futures and selling the stocks in the index.

E. None of the options are correct.

f) Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?

A. The CAPM

B. The multifactor APT

C. Both the CAPM and the multifactor APT

D. Neither the CAPM nor the multifactor APT

E. None of the options are correct.

g) Which of the following statement(s) is(are) true regarding the selection of a portfolio from those that lie on the capital allocation line?

I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.

II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.

III) Investors choose the portfolio that maximizes their expected utility.

A. I only

B. II only

C. III only

D. I and III

E. II and III