Assume that you own a diversified portfolio of 50 stocks and fear a market decline over the

Question:

Assume that you own a diversified portfolio of

50 stocks and fear a market decline over the next

6 months.

a. How could you protect your portfolio during this period using stock-index options?

b. How effective would this hedge be?

c. Other things being equal, if your portfolio consisted of 150 stocks, would the protection be more effective?

Stocks
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A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...