A Put Option on a Stock Has an Exercise Price

question 22

Multiple Choice

A put option on a stock has an exercise price of $42.If the stock price at expiration is $35,what is the option payoff for a short put position?

• A)$0
• B)$7
• C)-$7
• D)$35
• E)-$35

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Definitions:

Optimal Risky Portfolio

An investor’s best combination of risky assets; the combination that maximizes the Sharpe ratio.

Expected Utility

A theory in economics that calculates the utility expected from an investment or action, considering all possible outcomes weighted by their likelihood.

Less Risk-averse Investors

Individuals who are willing to take on greater levels of investment risk in pursuit of higher returns.

Efficient Portfolios

Portfolios that offer the best possible expected return for their level of risk, based on modern portfolio theory.