Examples of risk-increasing and risk-reducing options techniques to scale up or reduce overall portfolio risk. Introduction: Options are used to supervise the portfolio risk. They can boost the risk as well as diminish it. There are two categories of options one is risk increase and the second is a risk decrease option.

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Answer 1

Question

Chapter 20, Problem 1PS

Summary Introduction

To explain: Examples of risk-increasing and risk-reducing options techniques to scale up or reduce overall portfolio risk.

Introduction: Options are used to supervise the portfolio risk. They can boost the risk as well as diminish it. There are two categories of options one is risk increase and the second is a risk decrease option.

Expert Solution & Answer

Answer to Problem 1PS

The optional example of a risk-increasing option is at the money option while the protective put strategy is an example of a risk-reducing option technique.

Explanation of Solution

Given Information: Here a statement is provided that options are used to raise and reduce the portfolio risk.

Risk-increasing options- This technique boots up the level of portfolio risk while investing in particular folio, for example, at the money option. In this option the value of expiration will be null, hence it equates the asset price with an exercise price. These options are very risky but profitable also.

Risk-reducing options- This option reduces the risk with protection, for example, a protective put strategy. Investors invested in this option in the long run because the strike price is either lower than the market price or higher. The risk is reduced with full security of value in a particular portfolio.

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Students have asked these similar questions

We said that options can be used either to scale up or reduce overall portfolio risk. What are some examples of risk-increasing and risk-reducing options strategies? Explain each.

Which of the following statements is correct? A delta-neutral portfolio is protected against large changes in the underlying asset price. The delta hedging error increases as gamma decreases. To change the vega of a portfolio, we need to trade the portfolio’s underlying asset. A delta-neutral portfolio needs to be rebalanced more frequently as the gamma increases to maintain delta-neutrality. Please explain and justify your choice using your own words.

Which of the following is correct concerning optimal portfolios? Group of answer choices They have zero risk. They have the lowest risk. They have the highest risk/return tradeoff. They have the highest expected return

Answer 2

Question

Chapter 20, Problem 1PS

Summary Introduction

To explain: Examples of risk-increasing and risk-reducing options techniques to scale up or reduce overall portfolio risk.

Introduction: Options are used to supervise the portfolio risk. They can boost the risk as well as diminish it. There are two categories of options one is risk increase and the second is a risk decrease option.

Expert Solution & Answer

Answer to Problem 1PS

The optional example of a risk-increasing option is at the money option while the protective put strategy is an example of a risk-reducing option technique.

Explanation of Solution

Given Information: Here a statement is provided that options are used to raise and reduce the portfolio risk.

Risk-increasing options- This technique boots up the level of portfolio risk while investing in particular folio, for example, at the money option. In this option the value of expiration will be null, hence it equates the asset price with an exercise price. These options are very risky but profitable also.

Risk-reducing options- This option reduces the risk with protection, for example, a protective put strategy. Investors invested in this option in the long run because the strike price is either lower than the market price or higher. The risk is reduced with full security of value in a particular portfolio.

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Answer 3

Question

Chapter 20, Problem 1PS

Summary Introduction

To explain: Examples of risk-increasing and risk-reducing options techniques to scale up or reduce overall portfolio risk.

Introduction: Options are used to supervise the portfolio risk. They can boost the risk as well as diminish it. There are two categories of options one is risk increase and the second is a risk decrease option.

Expert Solution & Answer

Answer to Problem 1PS

The optional example of a risk-increasing option is at the money option while the protective put strategy is an example of a risk-reducing option technique.

Explanation of Solution

Given Information: Here a statement is provided that options are used to raise and reduce the portfolio risk.

Risk-increasing options- This technique boots up the level of portfolio risk while investing in particular folio, for example, at the money option. In this option the value of expiration will be null, hence it equates the asset price with an exercise price. These options are very risky but profitable also.

Risk-reducing options- This option reduces the risk with protection, for example, a protective put strategy. Investors invested in this option in the long run because the strike price is either lower than the market price or higher. The risk is reduced with full security of value in a particular portfolio.

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Answer 4

Question

Chapter 20, Problem 1PS

Summary Introduction

To explain: Examples of risk-increasing and risk-reducing options techniques to scale up or reduce overall portfolio risk.

Introduction: Options are used to supervise the portfolio risk. They can boost the risk as well as diminish it. There are two categories of options one is risk increase and the second is a risk decrease option.

Expert Solution & Answer

Answer to Problem 1PS

The optional example of a risk-increasing option is at the money option while the protective put strategy is an example of a risk-reducing option technique.

Explanation of Solution

Given Information: Here a statement is provided that options are used to raise and reduce the portfolio risk.

Risk-increasing options- This technique boots up the level of portfolio risk while investing in particular folio, for example, at the money option. In this option the value of expiration will be null, hence it equates the asset price with an exercise price. These options are very risky but profitable also.

Risk-reducing options- This option reduces the risk with protection, for example, a protective put strategy. Investors invested in this option in the long run because the strike price is either lower than the market price or higher. The risk is reduced with full security of value in a particular portfolio.

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Answer 5

Chapter 20, Problem 1PS

Summary Introduction

To explain: Examples of risk-increasing and risk-reducing options techniques to scale up or reduce overall portfolio risk.

Introduction: Options are used to supervise the portfolio risk. They can boost the risk as well as diminish it. There are two categories of options one is risk increase and the second is a risk decrease option.

Expert Solution & Answer

Answer to Problem 1PS

The optional example of a risk-increasing option is at the money option while the protective put strategy is an example of a risk-reducing option technique.

Explanation of Solution

Given Information: Here a statement is provided that options are used to raise and reduce the portfolio risk.

Risk-increasing options- This technique boots up the level of portfolio risk while investing in particular folio, for example, at the money option. In this option the value of expiration will be null, hence it equates the asset price with an exercise price. These options are very risky but profitable also.

Risk-reducing options- This option reduces the risk with protection, for example, a protective put strategy. Investors invested in this option in the long run because the strike price is either lower than the market price or higher. The risk is reduced with full security of value in a particular portfolio.

Answer 6

Chapter 20, Problem 1PS

Summary Introduction

To explain: Examples of risk-increasing and risk-reducing options techniques to scale up or reduce overall portfolio risk.

Introduction: Options are used to supervise the portfolio risk. They can boost the risk as well as diminish it. There are two categories of options one is risk increase and the second is a risk decrease option.

Expert Solution & Answer

Answer to Problem 1PS

The optional example of a risk-increasing option is at the money option while the protective put strategy is an example of a risk-reducing option technique.

Explanation of Solution

Given Information: Here a statement is provided that options are used to raise and reduce the portfolio risk.

Risk-increasing options- This technique boots up the level of portfolio risk while investing in particular folio, for example, at the money option. In this option the value of expiration will be null, hence it equates the asset price with an exercise price. These options are very risky but profitable also.

Risk-reducing options- This option reduces the risk with protection, for example, a protective put strategy. Investors invested in this option in the long run because the strike price is either lower than the market price or higher. The risk is reduced with full security of value in a particular portfolio.

Answer 7

Chapter 20, Problem 1PS

Summary Introduction

To explain: Examples of risk-increasing and risk-reducing options techniques to scale up or reduce overall portfolio risk.

Introduction: Options are used to supervise the portfolio risk. They can boost the risk as well as diminish it. There are two categories of options one is risk increase and the second is a risk decrease option.

Answer 8

Expert Solution & Answer

Answer to Problem 1PS

The optional example of a risk-increasing option is at the money option while the protective put strategy is an example of a risk-reducing option technique.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

Given Information: Here a statement is provided that options are used to raise and reduce the portfolio risk.

Risk-increasing options- This technique boots up the level of portfolio risk while investing in particular folio, for example, at the money option. In this option the value of expiration will be null, hence it equates the asset price with an exercise price. These options are very risky but profitable also.

Risk-reducing options- This option reduces the risk with protection, for example, a protective put strategy. Investors invested in this option in the long run because the strike price is either lower than the market price or higher. The risk is reduced with full security of value in a particular portfolio.

Answer 12

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