Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed fall, but BIC's portfolio performance was disappointing, lagging its peer group by nearly 10%. Washington is reviewing the options strategy to determine why the hedged portfolio did not perform as expected.

Required:

Which of the following best explains a delta-neutral portfolio? The return on a delta-neutral portfolio is hedged against:

multiple choice

• small price changes in the underlying asset.

• small price decreases in the underlying asset.

• all price changes in the underlying asset.