One of your high net worth clients (Jessica William-Matthew) has just received an inheritance of $50,000,000. Jessica is risk averse and has asked you to invest this money into an equity portfolio which is slightly less risky than the US market. In addition, Jessica wants to ensure that this money will benefit her children and her children’s children, her one requirement is that she wants to limit the downside risk that she has on this investment to $45,000,000 over the next twelve months.
a) You construct a portfolio consisting of two million shares equally split across 200 stocks which has a beta of 0.9 and dividend yield of 2.55% per annum with simple compounding. Current market conditions indicate that the S&P 500 index stands at 2500 with a dividend yield of 3.10% per annum with simple compounding and volatility of 15% annually. Further, the risk-free rate is 1% per annum with simple compounding. Detail the insurance strategy that will meet Jessica’s requirement.