You are a provider of portfolio insurance and are establishing a 4-year program. The portfolio you manage is worth $100 million, and you hope 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 that the portfolio pays no dividends.

a. How much of the portfolio should be sold and placed in bills? (Hint: What is the delta of the implicit put option conveyed by the portfolio insurance?)

b. What should the manager do if the stock portfolio falls by 3% on the first day of trading? p-69