Which of the Following Statements Is Correct

question 6

Multiple Choice

Which of the following statements is correct?

• A)Call options generally sell at a price less than their exercise value.
• B)If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.
• C)Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.
• D)Because of the put-call parity relationship, under equilibrium conditions, a put option on a stock must sell at exactly the same price as a call option on the stock.

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Definitions:

Market Risk Premium

The additional return expected from holding a risky market portfolio over a risk-free asset.

Beta

An indicator of how volatile a stock is compared to the general market, where a beta greater than 1 signifies volatility above the market average.

Risk Averse

A term describing investors or consumers who prefer lower risk and are willing to accept lower returns in exchange for increased certainty or safety.

Market Risk Premium

The additional return an investor expects to receive from holding a risky market portfolio instead of risk-free assets.