Repeat Problem 17.17 on the assumption that the portfolio has a beta
Problem 17.18.
Repeat Problem 17.17 on the assumption that the portfolio has a beta of 1.5. Assume that the dividend yield on the portfolio is 4% per annum.
Hint
When the value of the portfolio goes down 5% in six months, the total return from the portfolio, including dividends, in the six months is -5+2=-3%i.e., -6% per annum. This is 12% per annum less than the risk-free interest rate. Since the portfolio has a beta of 1.5 we would expect the market to provide a return of 8% per annum less than the risk-free interest rate, i.e., we would expect the ...
When the value of the portfolio goes down 5% in six months, the total return from the portfolio, including dividends, in the six months is
-5+2=-3%
i.e., -6% per annum. This is 12% per annum less than the risk-free interest rate. Since the portfolio has a beta of 1.5 we would expect the market to provide a return of 8% per annum less than the risk-free interest rate, i.e., we would expect the market to provide a return of -2% per annum. Since dividends on the market index are 3% per annum, we would expect the market index to have dropped at the rate of 5% per annum or 2.5% per six months; i.e., we would expect the market to have dropped to 1170. A total of 450000=1.5X300000 put options on the S&P 500 with exercise price 1170 and exercise date in six months are therefore required.