portfolio is currently worth $10 million and has a beta of 1.0. An index is currently standing at 800. Explain how a put option on the index with a strike of 700 can be used to provide portfolio insurance.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A portfolio is currently worth $10 million and has a beta of 1.0. An index is currently standing at 800. Explain how a put option on the index with a strike of 700 can be used to provide portfolio insurance.
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