QUESTION 21

1. A put option has a strike price of $45 and matures in one month. The current price of the underlying asset is $42. The option is:

   	a.	at the money
   	b.	in the money
   	c.	out of money

QUESTION 22

1. Roland Corp. has hired Delta Investment Bank to underwrite its secondary public offering. Delta already has a sell recommendation on the stock given by its research unit to its brokerage and trading. Which of the following actions is most appropriate to avoid violating CFA Institute Standards of Professional Conduct?

   	a.	Place the company on a restricted list and give only factual information about Roland.
   	b.	Change the rating from sell to buy because of its duty to clients.
   	c.	Use new research to substantiate that the stock deserves a buy rating.

QUESTION 23

1. The following table presents historical information for two stocks, RTF and KIU;

   Variance of returns for RTF	0.0625
   Variance of returns for KIU	0.0725
   Correlation coefficient between RTF and KIU	0.7500

   The covariance between RTF and KIU is closest to:

   	a.	0.0505
   	b.	0.0034
   	c.	0.0811

QUESTION 24

1. A primary reason for developing a strategic asset allocation is to:

   	a.	determine asset classes offering unique risk and return profiles with low correlations with each other
   	b.	minimize a portfolio's exposure to systematic risk
   	c.	prevent the overweighting of any single asset classes

QUESTION 25

1. A correlation matrix of returns for securities A, B, and C are reported below:

   Security	A	B	C
   A	1.0
   B	0.75	1.0
   C	0.0	-0.25	1.0

   Assuming that each security's expected return and standard deviation are the same, a portfolio consisting of an equal allocation of which two securities will be most effective for portfolio diversification?

   	a.	Security A and B
   	b.	Security A and C
   	c.	Security B and C