Which One of the Following Statements Related to the Implied

question 13

Multiple Choice

Which one of the following statements related to the implied standard deviation (ISD) is correct?

• A) The ISD is an estimate of the historical standard deviation of the underlying security.
• B) ISD is equal to (1 − d₁).
• C) The ISD estimates the volatility of an option's price over the option's lifespan.
• D) The value of ISD is dependent upon both the risk-free rate and the time to option expiration.
• E) ISD confirms the observable volatility of the return on the underlying security.

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Definitions:

Sales Tax

A tax imposed by governments on the sale of goods and services, calculated as a percentage of the sales price.

Proportional Rate Structure

A tax system where the tax rate remains constant regardless of the amount of income, as opposed to progressive or regressive tax structures.

Progressive Rate Structure

This is a tax system in which the tax rate increases as the taxable base amount increases, typically applied to incomes to ensure higher earners pay a greater percentage of their income.

Regressive Rate Structure

A tax system where the tax rate decreases as the taxable amount increases, placing a higher burden on lower earners relative to higher earners.