## Related questions with answers

Imagine you are a provider of portfolio insurance. You are establishing a four-year program. The portfolio you manage is currently worth 100 million dollars, 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 % per year. Assume for simplicity that the portfolio pays no dividends (or that all dividends are reinvested).

a. What fraction of the portfolio should be placed in bills? What fraction in equity?

b. What should the manager do if the stock portfolio falls by 3 % on the first day of trading?

Solution

VerifiedThe aim of this exercise is to determine, for a portfolio insurance strategy, what fraction of the portfolio should be placed in T-bills, and what fraction in equity. The computation needs to be realized in two scenarios: when the stock portfolio price remains constant during the program, and when this price falls on the first day of trading.

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