You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $190 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 5.5% per year. Assume that the portfolio pays no dividends. a-1. How much of the portfolio should be sold and placed in bills? a-2. How much of the portfolio should be sold and placed in equity? b-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place? b-2. What action should the manager take?
You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $190 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 5.5% per year. Assume that the portfolio pays no dividends. a-1. How much of the portfolio should be sold and placed in bills? a-2. How much of the portfolio should be sold and placed in equity? b-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place? b-2. What action should the manager take?
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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You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $190 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 5.5% per year. Assume that the portfolio pays no dividends.
a-1. How much of the portfolio should be sold and placed in bills?
a-2. How much of the portfolio should be sold and placed in equity?
b-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place?
b-2. What action should the manager take?
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