Which One of the Following Statements Concerning the Relationship Between

question 13

Multiple Choice

Which one of the following statements concerning the relationship between the volatility of the underlying stock price,as measured by sigma (σ) ,and call and put prices is correct?

• A) Call and put prices react fairly similarly in response to changes in sigma.
• B) Call prices increase and put prices decrease as sigma increases.
• C) Put price increase and call prices decrease as sigma increases.
• D) Call prices increase and put prices remain relatively constant and sigma increases.
• E) Neither put nor call prices are affected by changes in sigma.

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Definitions:

Market Risk Premium

The additional return expected by investors for taking on the higher risk of investing in the stock market over a risk-free investment.

Risk-Free Rate

The theoretical return on an investment with no risk of financial loss, typically represented by the yield on government bonds.

Constant Rate

A steady, unchanging value or percentage used in financial calculations, such as a fixed interest rate over time.

Required Return

The minimum expected return on an investment necessary for an investor to consider it worthwhile, taking into account the risk involved.