Question

An investor currently owns a portfolio of stocks and expects that the stock market will be down next quarter. How does the investor minimize the risk of potential capital loss without selling the portfolio?

Answer 1

when the investor is owning a Portfolio of stocks and he is also expecting that the stock market is going to go down, and the value of stock will eventually go down so he will be taking exposure into the derivative contracts and managing his overall risk exposure.

He can be managing his overall risk and controlling the downside through different measures-

A.he can be buying the put options which will provide him the right to sell various securities and he will gain on the relative downside performance of the portfolio.

B.he can also be selling the index futures as well as stock futures and it will help him to gain when the stock will be correcting on the way down side through downside movement.

C. He can also purchase the the VIX futures which will help him to gain through increase in the volatility.

So the investor can manage his portfolio by not selling even when he is expecting that the market is going to go down and manage his overall risk.