c5

Question 1

probability

Answer 1

relative frequency with which an event occurs

Question 2

expected value

Answer 2

the average outcome from an uncertain gamble

Question 3

risk taker

Answer 3

who likes to take risk

Question 4

risk aversion

Answer 4

not taking risk and refuse to take uncertain outcome

Question 5

risk neutral

Answer 5

Willing to accept any fair gamble(person is indifferent to certain outcome and a gamble with the same expected payoff)

Question 6

fair insurance

Answer 6

insurance for which the premium is equal to the expected value of the loss

Question 7

diversification

Answer 7

spread the risk by investing in different companie’s stocks

Question 8

option contract

Answer 8

financial contract offering the right, but not the obligation to buy or sell an asset over a specialized period

Question 9

call option

Answer 9

gives the buyer the right to sell a specific amount of assets a predetermined price within a set time frame

Question 10

strike price

Answer 10

the price at which the buyer can sell the asset

Question 11

in the money

Answer 11

if the market price is above the strike price

Question 12

put option

Answer 12

buyer of the put option is short on the underlying asset, expecting the price of the stock to decrease

Question 13

Selling Puts

Answer 13

seller of the put option is long, meaning they expected the price of the underlying asset will increase

Question 14

premium

Answer 14

the buyer pays a premium to the seller, and this is forfeited

Question 15

naked put

Answer 15

the seller has no position just collecting premium as income

Question 16

put an option

Answer 16

a contract that gives the buyer the right to purchase a specific asset at a set price within a set time period

Question 17

right

Answer 17

buyer has the right to buy the asset but is not obligated to do so

Question 18

time

Answer 18

the buyer has a set amount of time, known as the expiration date to exercise the option

Question 19

black scholes model

Answer 19

determines based on the markets risk and calculates the price of the company’s option

Question 20

American and European option market difference

Answer 20

Allows exercise at any time before the expiration time while European options can be exercised on the expiration date

Question 21

capital asset pricing model

Answer 21

A model that describes the relationship between the expected return and risk of investing in a security

Question 22

beta

Answer 22

measures its volatility of returns relative to the market(used as a measure of risk)