A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500 and is worth $240 million. The value of the S&P 500 is 4,800, and the portfolio manager would like to obtain insurance against a reduction of more than 3% in the value of the portfolio over the next four months. The risk-free interest rate is 6% per annum. The dividend yield on both the portfolio and the S&P 500 is 4%, and the volatility of the index is 35% per annum. What amount (in dollars) of the portfolio should be sold and kept in risk-free securities for portfolio insurance?
A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500 and is worth $240 million. The value of the S&P 500 is 4,800, and the portfolio manager would like to obtain insurance against a reduction of more than 3% in the value of the portfolio over the next four months. The risk-free interest rate is 6% per annum. The dividend yield on both the portfolio and the S&P 500 is 4%, and the volatility of the index is 35% per annum. What amount (in dollars) of the portfolio should be sold and kept in risk-free securities for portfolio insurance?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500
and is worth $240 million. The value of the S&P 500 is 4,800, and the
like to obtain insurance against a reduction of more than 3% in the value of the portfolio over the
next four months. The risk-free interest rate is 6% per annum. The dividend yield on both the
portfolio and the S&P 500 is 4%, and the volatility of the index is 35% per annum. What amount
(in dollars) of the portfolio should be sold and kept in risk-free securities for portfolio insurance?
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