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You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $$130$ million, and you promise to provide a minimum return of $0%$. The equity portfolio has a standard deviation of $25%$ per year, and T-bills Day $5.6%$ per year. Assume that the portfolio pays no dividends. Required: a-1. How much of the portfolio should be sold and placed in bills? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) -2. How much of the portfolio should be sold and placed in equity? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) o-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by $3%$ on the first day of trading, before the hedge is n place? (Input the value as a positive value. Do not round intermediate calculations. Round your answers to 2 decimal places.) o-2. What action should the manager take? (Enter your answer in millions rounded to 2 decimal places. Do not round intermediate calculations.)

Solution:

a-1) Calculation of the Percentage of the Portfolio should be Placed in Bills:

(current value of the portfolio)

(floor promised to clients, 0% return)

(volatility)