Question
28. You are a portfolio manager, and you wish to invest in a stock having = 40%. You also want to create a put option
28. You are a portfolio manager, and you wish to invest in a stock having = 40%. You also want to create a put option on the investment, so that at the end of the year you won't have more than 5% losses. Since there is no put option on this specific stock, you plan to build a synthetic put by engaging in a dynamic investment strategy - purchasing a portfolio composed of dynamically changing proportions of the risky asset and risk-free bonds. If the interest rate is 6%, how much should you invest initially in the portfolio and in the risk-free bond?
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