Question
William Cambridge is an equity portfolio manager at Allgood Securities. Cambridge owns a stock with a market price of $85. A put option on the
William Cambridge is an equity portfolio manager at Allgood Securities. Cambridge owns a stock with a market price of $85. A put option on the stock with an exercise price of $80 sells for $2.60. Brown is considering buying the put option to complement his long stock position. When discussing this strategy with a colleague, Cambridge makes the following statements:
Statement #1: | Although my strategy exposes me to unlimited loss potential, I will follow it because I believe in taking risks to earn extra returns. |
Statement #2: | My strategy is relatively aggressive because it involves the use of derivatives. |
Cambridge is correct with respect to:
A) statement 1 only.
B) statement 2 only.
C) neither statement 1 nor statement 2.
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