Equity Investments MCQ - Equity Investments Section 1

16 Which of the following is least likely an objective of market regulation?

Ensuring that investors earn at least the risk free rate is least likely to be an objective of market regulation

17 Mr. Aslam opens a margin account with an initial deposit of $6,000. He then purchases 250 shares of a stock at $35 each on margin, and his account requires a maintenance margin of 35%. Ignoring commissions and interest, the price at which Mr. Aslam will receive a margin call is closest to:

Equity / Market Value = Maintenance Margin {6000 + [P x 250 – (35 x 250)]}/ P x 250 = 35% P = $16.92.

18 Mr. Ahmed writes a put option on the S&P 500 Index futures. Which of the following best describes his position with respect to the put contract and his exposure in the underlying index future respectively?

Since Mr. Ahmed has written a put contract, he is short the option and has an obligation to purchase the asset if exercised by the put owner. He also has a long exposure to the risk of the underlying index future because he benefits when its quoted price increases—that is, when the put declines in value (or suffers a loss when its quoted price decreases as the put increases in value).

19 Mike buys a stock at $50 and wants to limit downside risk. Which of the following orders will most likely guarantee that he can sell the stock at $40? (GTC means good till cancelled)

Option contracts are executed at the strike price and can therefore be viewed as limit orders. In this case, a put buy order at a strike price of $40 will guarantee selling the stock at $40.

20 Analyst 1: A security market index represents the level of risk in the market.
Analyst 2: A security market index represents the security market, market segment or asset class.

Which analyst’s statement is most likely correct?

A security market index represents the security market, market segment or asset class.