The Volatility of a Stock Index Falls Sharply,the Index Drops

question 20

Multiple Choice

The volatility of a stock index falls sharply,the index drops in value,and its expected return increases.Assuming all else (dividend yield,interest rates,etc. ) are constant,which of the following is true?

• A)The futures price on the index increases because of the increased expected return on the index.
• B)The futures price decreases because of the drop in the level of the index.
• C)The futures price stays the same because the drop in the level of the index is negated by the increased expected return.
• D)The futures may increase,decrease or stay the same depending on the extent of fall in volatility relative to the increase in expected returns.

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Definitions:

Income Ratio

A metric used to assess the profitability of a company, often calculated as net income divided by total revenues or sales.

Unlimited Life

An accounting concept referring to corporations that continue to exist irrespective of the status or continuity of their owners.

Legal Liability

The legal responsibility to settle financial debts or obligations resulting from lawsuits or breaches of contract.

Business Entities

Organizations established as separate legal entities for the purpose of conducting business, such as corporations, partnerships, and sole proprietorships.