1. Which of the following would not be an example of managing risk?
Answer
Correct Answer:
Investing completely in a new biotech firm
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2. Which of the following is a way to quantify the risk of a given security?
Answer
Correct Answer:
Calculate the probability and magnitude of potential loss
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3. How would an options investor diversify their portfolio?
Answer
Correct Answer:
All of the above
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4. Which of the following is a common strategy used after an options trader has had a few successful transactions?
Answer
Correct Answer:
They withdraw their original capital and use only profits to trade with.
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5. What would an investor who is employing the straddle technique hope to happen?
Answer
Correct Answer:
That the price will move drastically in one direction, up or down
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6. What should an options investor do if a call option they own is out of the money and nearing expiration?
Answer
Correct Answer:
Depends on their tolerance level for risk and their strategy
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7. Which of the following would be a good example of risk mitigation?
Answer
Correct Answer:
Purchasing stock options in three industries
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8. What would be the objective of a conservative trader's portfolio?
Answer
Correct Answer:
Long term returns over time
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9. Which of the following would technical analysis include?
Answer
Correct Answer:
Stock pricing
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10. What does heavy volume trading indicate?
Answer
Correct Answer:
Typically that news has come out regarding the underlying stock
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11. What is the offset to limiting downside?
Answer
Correct Answer:
Often limited profits
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12. What does the Monte Carlo method of pricing options attempt to do?
Answer
Correct Answer:
Calculate a price based on weighting potential outcomes
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13. What would an investor with a large risk tolerance level most likely do?
Answer
Correct Answer:
Sell options of a security of which they do not own the underlying stock
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14. Why is it important to manage risk when trading stock options?
Answer
Correct Answer:
Because of the risky nature of stock options
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15. What is the "expiration date"?
Answer
Correct Answer:
The date on which the options contract expires and can no longer be executed or traded
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16. What is meant by "long" in a stock or option?
Answer
Correct Answer:
Intention to hold a security for a long period of time
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17. Which of the following would help protect against downside risk?
Answer
Correct Answer:
Placing a limit order
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18. Why would an investor not utilize an options trading strategy?
Answer
Correct Answer:
Because of the belief that they do not work, and it is a wasted effort
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19. Which of the following situations has the least risk?
Answer
Correct Answer:
Selling covered call options
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20. Why would someone sell call options on a security they own?
Answer
Correct Answer:
Because they believe the security price will fall, creating profit from the calls
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21. Which of the following is the most profitable?
Answer
Correct Answer:
Deep in the money call options
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22. What is candlesticking?
Answer
Correct Answer:
A charting technique which shows price movements over time indicating the high and the low daily
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23. How does the "Iron Condor" technique limit the downside?
Answer
Correct Answer:
The shorted options have different strike prices, creating a stagger.
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24. How is risk measured?
Answer
Correct Answer:
Individually, each investor assesses their own risk tolerance level
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25. What is the primary goal of technical analysis?
Answer
Correct Answer:
Identifying trends to predict near term price movements
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26. Why would an options trader want to create various portfolios?
Answer
Correct Answer:
Because each portfolio would be set up to meet specific goals
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27. What is the purpose of candlestick charting?
Answer
Correct Answer:
A lot of price information such as open, close, high and low can be relayed in a graph.
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28. What happens when a trader uses a straddle?
Answer
Correct Answer:
They buy a call and a put option at the same strike price.
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29. What is the relationship between fundamental and technical analyses?
Answer
Correct Answer:
They can both be used to complement each other, but not together.
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30. What would an investor using the Black Scholes model be doing?
Answer
Correct Answer:
Calculating the implied price of an option based on several factors
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31. What is meant "short selling"?
Answer
Correct Answer:
Selling a stock without owning it, with the expectation of purchasing the stock at a later date at a cheaper price
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32. Which of the following is an assumption made by a technical analyst?
Answer
Correct Answer:
The stock price already reflects all news and news events and they do not impact a stock's price.
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33. What is a "strangle"?
Answer
Correct Answer:
Buying or selling a put and a call with different strike prices
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34. What is the legal requirement regarding portfolios?
Answer
Correct Answer:
There is no legal requirement to create portfolios.
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35. What is a "put"?
Answer
Correct Answer:
An options contract which gives the holder the right to sell the underlying stock at a predetermined price
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36. What is an "option spread"?
Answer
Correct Answer:
Buying and selling stock options at different strike prices for the same security
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37. What is meant by a "bull market"?
Answer
Correct Answer:
When expectations are that the market will rise
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38. What factors does technical analysis primarily rely on?
Answer
Correct Answer:
Past price and volume
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39. How often should a trader revaluate the holdings in their portfolios?
Answer
Correct Answer:
Continuously, but not daily
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40. Which of the following would not be an example of managing risk?
Answer
Correct Answer:
Selling calls on a security which is owned
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41. Which of the following would most likely be a way to classify various portfolios?
Answer
Correct Answer:
By the time horizon of the investments contained within it
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42. Which of the following is an example of options used to mitigate risk?
Answer
Correct Answer:
Buying a put option for a stock which is currently owned
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43. Which of the following would be a way to limit one's potential losses?
Answer
Correct Answer:
Not using margin to trade with
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44. Why would an investor be unlikely to hold growth, value, small cap, and index portfolios all at once?
Answer
Correct Answer:
Because they are completely different investment perspectives
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45. Why do investors often expect the beginning of the year stock prices to rise?
Answer
Correct Answer:
Because the year end sales typically bolster profits and increase demand
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46. Which of the following is a criticism of both fundamental and technical analyses?
Answer
Correct Answer:
Neither one can accurately predict future stock price movements.
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47. What is portfolio management?
Answer
Correct Answer:
Having a suite of investments to reach a goal while minimizing risk
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48. What happens to an investment if risk is mitigated properly?
Answer
Correct Answer:
Nothing specific happens to any one investment; risk mitigation is an overall portfolio tool.
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49. Which of the following is an advantage of having multiple portfolios instead of only one?
Answer
Correct Answer:
Goals can be set for each portfolio and tracked separately.
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50. Why would an options trader invest only in options of companies which have a history of paying dividends?
Answer
Correct Answer:
Because it lowers risk in investment
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51. What is a sideways chart?
Answer
Correct Answer:
When a stock price moves within a relatively narrow band
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52. What is meant by a "bear market"?
Answer
Correct Answer:
When expectations are that the market will fall
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53. Why might an options trader have portfolios based on expiration?
Answer
Correct Answer:
Because options expiring in the near term need to be monitored more actively
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54. Why would a trader liquidate a portfolio?
Answer
Correct Answer:
Because he is no longer interested in the classification of stocks
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55. Which of the following is the least risky investment in options?
Answer
Correct Answer:
Selling options which expire one year from now
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56. What does an options trader look for when charting?
Answer
Correct Answer:
Options which have broken the trend
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57. What is "strike price"?
Answer
Correct Answer:
The price on an options contract at which the underlying stock can be bought or sold
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58. What is meant by a "butterfly" trading strategy?
Answer
Correct Answer:
Complex trading strategy involving buying two calls and selling two calls
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59. Would a person who actively buys and sells options contracts be considered an investor?
Answer
Correct Answer:
No, they are a trader looking for short term gains.
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60. What is a "call"?
Answer
Correct Answer:
An options contract which gives the holder the right to buy a stock at a predetermined price
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61. When is the straddle trading strategy appropriate?
Answer
Correct Answer:
When an investor believes there will be a large stock price movement, but does not know in which direction
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62. What would be the risk tolerance level of a retired government worker in general?
Answer
Correct Answer:
Low
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63. What is the primary method to mitigate risk?
Answer
Correct Answer:
Diversifying investment holdings
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64. What is meant by using the straddle stock trading strategy?
Answer
Correct Answer:
When an investor owns both call and put stock options at the same stock price
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65. What is meant by a covered call?
Answer
Correct Answer:
Buying a stock, and selling a call at the same time
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66. How would an options trader use the Black Scholes pricing model as a trading strategy?
Answer
Correct Answer:
To look for options which are priced in the market at less than the Black Scholes price
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67. How often would an active options trader perform technical analysis?
Answer
Correct Answer:
It is an ongoing process performed during the hours after each day's activity.
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68. Which type of analysis relies on charting?
Answer
Correct Answer:
Both Fundamental and Technical
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69. What is a "margin account"?
Answer
Correct Answer:
A stock trading account which allows the holder to borrow money from the broker
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70. What would an investor who is bullish most likely do?
Answer
Correct Answer:
Buy call options
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71. What is the ideal number of portfolios for an experienced trader?
Answer
Correct Answer:
5
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72. Why is it important for an investor to know their risk tolerance level before trading options and investing in general?
Answer
Correct Answer:
Because they can match their risk tolerance level with the types of stocks they are purchasing
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73. Why are younger people more apt to take on riskier investments?
Answer
Correct Answer:
Because they have a longer time horizon to allow for the risky investments to increase over time, and are immune to the short term changes
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74. What is a "straddle"?
Answer
Correct Answer:
Holding both a call and a put at the same strike price
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75. Why would someone buy call options at the same strike price but stagger the expiration date?
Answer
Correct Answer:
Because they believe there will be an upward movement in the price but are uncertain of the timing
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76. How does selling options help someone with their portfolio?
Answer
Correct Answer:
They can profit from the sale of options without having to cover them.
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77. What should a trader do if one portfolio is outperforming the others?
Answer
Correct Answer:
Depends on the goals of each portfolio; they could still all be meeting expectations.
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78. What is an options contract?
Answer
Correct Answer:
A contract to buy or sell a stock at a predetermined price
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79. When would someone most likely place a stop loss order?
Answer
Correct Answer:
When they own deep in the money call options
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80. What is the purpose of using screening factors?
Answer
Correct Answer:
They are preset criteria that any investment must meet before an investor will consider it a viable investment.
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81. Which of the following is the optimal situation?
Answer
Correct Answer:
Limiting downsize risk while having the most upside potential possible
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82. What is the most classic type of options trading?
Answer
Correct Answer:
Buying call options and selling after an increase in value
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