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1. A portfolio manager in charge of a portfolio worth $10 million is concerned that the market might decline rapidly during the next six months and would like to use options on the S&P 100 to provide protection against the portfolio falling below$9.5 million. The S&P 100 index is currently standing at 500 and each contract is on 100 times the index.
(i) If the portfolio has a beta of 1, how many put option contracts should be purchased?
(ii) If the portfolio has a beta of 1, what should the strike price of the put options be?
(iii)If the portfolio has a beta of 0.5, how many put options should be purchased?(iv) If the portfolio has a beta of 0.5, what should the strike prices of the put options be? Assume that the risk-free rate is 10% and the dividend yield on both the portfolio and the index is 2%.
The stock with the lowest beta (0.76) is Apple Inc. stock. The stock with the highest beta (3.29) is Facebook Inc. stock. Beta for Apple Inc. stock is less that 1, it tells us that stock price is less volatile and risky than mark..
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