Suppose you manage a $25 million fund that will close in five years. An objective of this fund is to insure against large losses, such that the fund will not lose value (i.e. the fund value will be at least $25 million in five years).
The prospectus for this fund states that you can invest in a risky equity portfolio comprised of stocks that do NOT pay dividends. You can also hold T-bills. The equity portfolio’s standard deviation is 30%.
Assume that T-bills return 2.0%.
a. What would be the delta of the fund assuming you could acquire a protective put on the equity portfolio?