Question
In: Finance
A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500 and...
A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500 and is worth $360 million. The value of the S&P 500 is 1,200, and the portfolio manager would like to buy insurance against a reduction of more than 5% in the value of the portfolio over the next six months. The risk-free interest rate is 6% per annum. The dividend yield on both the portfolio and the S&P 500 is 3%, and the volatility of the index is 30% per annum.
a. If the fund manager buys traded European put options, how much would the insurance cost?
b. Explain carefully alternative strategies open to the fund manager involving traded European call options, and show that they lead to the same result.
c. If the fund manager decides to provide insurance by keeping part of the portfolio in risk-free securities, what should the initial position be?
d. If the fund manager decides to provide insurance by using nine-month index futures, what should the initial position be?
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Well-diversified portfolio A has a beta of 1.0 and an expected return of 12%. Well-diversified portfolio...
Well-diversified portfolio A has a beta of 1.0 and an expected
return of 12%. Well-diversified portfolio B has a beta of 0.75 and
an expected return of 9%. The risk-free rate is 4%. a. Assuming
that portfolio A is correctly priced (has ?? = 0), what should the
expected return on portfolio B be in equilibrium? b. Explain the
arbitrage opportunity that exists and explain how an investor can
take advantage of it. Give specific details about what to buy...
1.Portfolio Investment. An investor has decided to invest $13,000 in an S&P 500 index fund and...
1.Portfolio Investment.
An investor has decided to invest $13,000 in an
S&P 500 index fund and $7,000 in 10-year
treasury bonds (T-bonds). The index fund is expected to have an
average annual rate of return of 6.8%. The T-bonds
are guaranteed to pay annual interest of 0.70% (as
of Oct 2, 2020).
Assuming the stock market return is as the investor
expects, how much will this $20,000 investment be worth the end of
10 years?
2.Refer to the Portfolio Investment...
Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager, has...
Suppose Emma holds a well-diversified stock portfolio. Her son,
Andrew, who is a portfolio manager, has just advised her not to
invest in stocks of oil refining industry because their prices tend
to have much higher volatility relative to other stocks. Is
Andrew’s advice sound? Explain.
Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager, has...
Suppose Emma holds a well-diversified stock portfolio. Her son,
Andrew, who is a portfolio manager, has just advised her not to
invest in stocks of oil refining industry because their prices tend
to have much higher volatility relative to other stocks. Is
Andrew’s advice sound? Explain.
Karen currently has $5 million invested in a long-term bond fund
which has an expected return of 7% and a standard deviation of 18%.
Her son, Michael, recommends her to consider changing to invest...
Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager, has...
Suppose Emma holds a well-diversified stock portfolio. Her son,
Andrew, who is a portfolio manager, has just advised her not to
invest in stocks of oil refining industry because their prices tend
to have much higher volatility relative to other stocks. Is
Andrew’s advice sound? Explain.
Karen currently has $5 million invested in a long-term bond fund
which has an expected return of 7% and a standard deviation of 18%.
Her son, Michael, recommends her to consider changing to invest...
Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager, has...
Suppose Emma holds a well-diversified stock portfolio. Her son,
Andrew, who is a portfolio manager, has just advised her not to
invest in stocks of oil refining industry because their prices tend
to have much higher volatility relative to other stocks. Is
Andrew’s advice sound? Explain.
Suppose you invest $15,000 in an S&P 500 Index fund (S&P fund) and $10,000 in a...
Suppose you invest $15,000 in an S&P 500 Index fund (S&P
fund) and $10,000 in a total bond market fund (Bond fund). The
expected returns of the S&P and Bond funds are 8% and 4%,
respectively. The standard deviations of the S&P and Bond funds
are 18% and 7% respectively. The correlation between the two funds
is 0.40. The risk-free rate is 2%. What is the expected return on
your portfolio? What is the standard deviation on your portfolio?
What...
A reason to hold a portfolio of S&P 500 shares is a. Such a portfolio achieves...
A reason to hold a portfolio of S&P 500 shares is
a. Such a portfolio achieves close to optimal gains from equity
diversification
b. Such a portfolio has returns that approach market returns
c. Such a portfolio can be easily acquired through mutual
funds
d. All of the above
a. Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager,...
a. Suppose Emma holds a well-diversified stock portfolio. Her
son, Andrew, who is a portfolio manager, has just advised her not
to invest in stocks of oil refining industry because their prices
tend to have much higher volatility relative to other stocks. Is
Andrew’s advice sound? Explain.
b. Karen currently has $5 million invested in a long-term bond
fund which has an expected return of 7% and a standard deviation of
18%. Her son, Michael, recommends her to consider changing...
a. Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager,...
a. Suppose Emma holds a well-diversified stock portfolio. Her
son, Andrew, who is a portfolio manager, has just advised her not
to invest in stocks of oil refining industry because their prices
tend to have much higher volatility relative to other stocks. Is
Andrew’s advice sound? Explain.
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- E13.10 Donated Long-Lived Assets Angel Flights provides transportation to medical facilities for special needs children. At...
- Write to either the President (on fiscal policy) or to the Chair of the Federal Reserve...
- Which of the following will increase both the price level and real GDP? Group of answer...
- After reading chapter 4, identify the major changes that took place in the DSM-5. Do you...
- Hi, could you discuss how you could train employees in the performance management and review process,...
- which of the following is a net sugar source for a deciduous angiosperm tree? A. new...
- What changes could be made to improve the quality of higher education in the United States?
ADVERTISEMENT