Suzanne Harlan has a large, well-diversified stock and bond portfolio. She wants to try some alternative investments, such as hedge funds, and has contacted Lawrence Phillips, CFA, to help assemble a new portfolio.

Before agreeing to make recommendations for Ms. Harlan, Mr. Phillips wants to determine if she is a good candidate for alternative investments. He gives her a standard questionnaire. Here are some of her comments:

Im interested in high returns. Im not afraid of risk, and Im investing money for the benefit of my heirs.

• I pay a lot of attention to expense and return data from my investments and track their performance closely.
• Investors have told me that assessing the quality of hedge funds is difficult, so Im interested in purchasing a fund of funds where I can diversify my risk while potentially sharing in some outsized returns.
• I pay several million dollars in taxes every year, and I want any additional investments to be tax-friendly.
• My neighbors founded Kelly Tool and Die 20 years ago. They are declaring bankruptcy, and I am interested in obtaining a partial interest in the business.

Ms. Harlan then tells Mr. Phillips that it is imperative that the returns of any investments he recommends must be in some way comparable to a benchmark.

Mr. Phillips is not excited about the business idea or the fund of funds. However, he does know of several managers of individual hedge funds. He talks her out of a fund of funds and suggests she put her money in the Stillman Fund, which concentrates on spin-offs, generally buying the spun-off company and shorting the parent company.

5) Explain carefully a protective put and provide an example.