Q1: The Black-Scholes model is primarily used to determine the value of:
- (A) Bonds
- (B) Stocks
- (C) Options
- (D) Futures Contracts
Answer: (C) Options
Q2: In financial mathematics, the risk-free rate is often assumed to be:
- (A) 0%
- (B) The interest rate on government bonds
- (C) The return rate of stocks
- (D) The inflation rate
Answer: (B) The interest rate on government bonds
Q3: In the context of the Capital Asset Pricing Model (CAPM), the market portfolio consists of:
- (A) All assets in the economy weighted by market value
- (B) All risk-free assets
- (C) A single stock with the highest return
- (D) Only the most volatile assets
Answer: (A) All assets in the economy weighted by market value
Q4: The price of a European call option under the Black-Scholes model depends on all of the following parameters EXCEPT:
- (A) Stock price
- (B) Strike price
- (C) Time to maturity
- (D) Transaction cost
Answer: (D) Transaction cost
Q5: In the binomial option pricing model, the risk-neutral probability is used to:
- (A) Calculate the expected return on the stock
- (B) Determine the value of an option by discounting future payoffs
- (C) Adjust for the risk-free rate
- (D) Price the underlying asset directly
Answer: (B) Determine the value of an option by discounting future payoffs
Q6: The net present value (NPV) of an investment is positive if:
- (A) The future cash flows are greater than the initial investment
- (B) The discount rate is greater than the rate of return
- (C) The future cash flows are discounted at a higher rate
- (D) The project is riskier than other investments
Answer: (A) The future cash flows are greater than the initial investment