Which portfolio are worth more return if volatility increase

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Reference no: EM133981603

Problem

You are bullish on company ABC and company XYZ. Suppose you have $2 million to invest. You consider four different investment strategies in the form of portfolios:

Note that we assume the variances of ABC and XYZ are similar (say within 20% of each other) AND positively correlated.

Portfolio 1

Buy $1 million worth of ABC stock using cash.
Buy $1 million worth of XYZ stocks using cash.

Portfolio 2

Buy $2 million worth of ABC stock using $1 million and borrowing $1 million.
Buy $2 million worth of XYZ stock using $1 million and borrowing $1 million.

Portfolio 3

Buy call options on ABC stock expiring in 1 month, with strike $5 higher than ABC's stock price. The cost of all these ABC options is not more than $500,000. Get the instant assignment help.

Buy call options on XYZ expiring in 1 month, with strike $5 higher than XYZ's stock price. The cost of all these XYZ options is not more than $500,000.

Portfolio 4

Sell put options on ABC expiring in 1 month, with strike $5 lower than ABC's stock price.
Sell put options on XYZ expiring in 1 month, with strike $5 lower than XYZs' stock price.

Which portfolio(s) are worth more return if volatility increased? Give at least 2 reasons.

Reference no: EM133981603

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