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TEST BANK Chapter One Introduction Multiple Choice 1. The Orange County, California bankruptcy was largely due to the Treasurer’s use of a. derivatives. b. Mortgage-backed securities. c. repurchase agreements. d. zero coupon bonds. ANSWER: C 2. All of the following are true regarding futures contracts except a. they are marked to market. b. they require payment of a performance bond. c. they are a legally enforceable promise. d. they are regulated by the SEC. ANSWER: D 3. A security giving you the right to sell is a a. put option. b. call option. c. short futures contract. d. long futures contract. ANSWER: A 4. A forward contract is most similar to a a. futures contract. b. call option. c. put option. d. debt security. ANSWER: A 5. A person who combines derivatives with a business risk is a __________. a. speculator b. hedger c. spreader d. trader ANSWER: B 67 Chapter 1. Introduction 6. Which of the following is not a principal category of derivative asset? a. options b. futures c. straddles d. swaps ANSWER: C 7. Finance is sometimes called a. the study of arbitrage. b. applied accounting. c. behavioral economics. d. mathematical science. ANSWER: A 8. Derivative use includes all of the following except a. income generation. b. long-term capital appreciation. c. speculation. d. risk management. ANSWER: B 9. Writing an option refers to a. the establishment of a new position. b. the sale of an existing position. c. the creation and sale of a position. d. the purchase of an existing position. ANSWER: C 10. Futures contracts trade on all of the following except ___________. a. silver b. the weather c. live cattle d. land ANSWER: D 68 Chapter 1. Introduction Statistical Appendix Multiple Choice 1. An observation whose value changes is a. a random variable. b. discrete. c. continuous. d. a statistic. ANSWER: A 2. A population with well-known characteristics is a __________. a. statistic b. sample c. distribution d. sample statistic ANSWER: C 3. All of the following are measures of central tendency except _________. a. mean b. standard deviation c. mode d. median ANSWER: B 4. The square of the standard deviation is the ___________. a. variance b. sigma c. mode d. skewness ANSWER: A 5. About __% of the area under a normal distribution lies within two standard deviations of the mean. a. 65% b. 75% c. 85% d. 95% ANSWER: D 6. Volatility is most closely associated with a. the median. b. the central limit theorem. c. dispersion. d. central tendency. ANSWER: C 69 Chapter 1. Introduction 7. A distribution showing skewness is a. not symmetric. b. normal. c. uniform. d. triangular. ANSWER: A 8. A standard normal distribution has a. a mean of zero. b. a mean of one. c. a mean equal to the standard deviation. d. a mean equal to the variance. ANSWER: A 9. Two variables are independent if a. they come from different distributions. b. their correlation coefficient is negative. c. their correlation coefficient is positive. d. their correlation coefficient is zero. ANSWER: D 10. Which of the following is true? a. The correlation coefficient is always positive. b. The absolute value of the correlation coefficient is always less than one. c. Independent variables have a correlation coefficient not statistically different from zero. d. Correlated variables are usually inversely related. ANSWER:C 70