When FED announces to increase interest rates? What should happen to stock market portfolio price?

1. Price should drop.

2. Price should Increase.

3. Price should drop by a magnitude closer to the drop seen in a 20-year zero-coupon bond than to that in a 1-year zero-coupon bond.

4. Price increase because expected return increases.

		1
		1, 3
		2, 4
		2

Question 23

As we know from the LTCM case, after every major crisis, the option implied volatility exhibits a smirk pattern. This means:

		It is the result of dynamic hedging.
		Investors in the market have higher demand to buy insurance against major market crashes going forward.
		The smirk is predicted by the option model by Scholes and Merton.
		The pattern should have been a smile instead of a smirk.