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
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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.
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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...
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a. Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager,...
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son, Andrew, who is a portfolio manager, has just advised her not
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tend to have much higher volatility relative to other stocks. Is
Andrew’s advice sound? Explain.
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fund which has an expected return of 7% and a standard deviation of
18%. Her son, Michael, recommends her to consider changing...
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