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1 Nov 2018

Discuss a strategy to incorporate international bonds in your portfolio. If you don’t already have a portfolio, pretend you are about to start one.

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Deanna Hettinger
Deanna HettingerLv2
3 Nov 2018

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  • Recommend a bond strategy for risk-tolerant and risk-adverse investors. Describe the key factors you considered when preparing the strategy.
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You have probably heard the saying, “Don’t put all of your eggs into one basket.” Using the terms for stand-alone risk, market risk, and diversifiable risk, discuss and explain how an asset (for example, a single stock) held as part of a portfolio is generally less risky than the same asset held in isolation. Explain if you think the risk of a portfolio can be reduced to zero by increasing the number of stocks in the portfolio.

Q1. Suppose you are managing a stock portfolio that is currently valued at $2,000,000. You expect the stock market will be bullish in the next 6 months. But you are also aware of a small chance of market crash and you want to insure that your portfolio value will be at least $1,800,000 in 6 months even in a market crash. In other words, you don’t want to suffer more than 10% loss in the next 6 months. Assume your stock portfolio has a beta of 1.5, the current S&P 500 level is 2,000 and the risk-free rate is 1% per annum.

How would you hedge against your portfolio value dropping below $1.8M in 6 months? Be specific with your strategy. If you are using options, specify what the underlying asset is, the strike price, time to expiration. whether it’s a call or a put and how many units to buy or short.

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