Actually make the investment that is insured

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Reference no: EM131811017

Portfolio insurance can be arranged in several ways. An investor can purchase a call and a protective put to guard against a greater than expected decline in the value of the underlying security. An investor can also buy actual insurance that pays the investors if the investment does not result in an expected return. An investor can even buy insurance that will pay if an investment that the investor did not actually make does not result in the expected return. All of this is perfectly legal.

Why can an investor buy insurance on a risk that the investor does not actually have because the investor did not actually make the investment that is insured? Does this make any sense? Why, or why not?

Reference no: EM131811017

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