Suppose a hedge fund follows the excel following strategy. Each month it holds $100 million of an S&P 500 index fund and writes out-of-the-money put options on $100 million of the index with exercise price 5% lower than the current value of the index. Suppose the premium it receives for writing each put is $.25 million, roughly in line with the actual value of the puts.

a. Calculate the Sharpe ratio the fund would have realized in the period October 1982- September 1987. Compare its Sharpe ratio to that of the S&P 500. Use the data from the previous problem, available in Connect, and assume the monthly risk-free interest rate over this period was .7%.

b. Now calculate the Sharpe ratio the fund would have realized if we extend the sample period by 1 month to include October 1987.

c. What do you conclude about performance evaluation and tail risk for funds pursuing option-like strategies?