When stock portfolio managers use dynamic asset allocation by writing call options on a stock index, they ____ their exposure to stock market conditions.

Question

Quizplus · Accepted Answer

Writing call options on a stock index allows portfolio managers to generate additional income while reducing their exposure to stock market conditions. By selling call options, they can take advantage of the time decay of options and potentially earn profits even if the stock market remains stagnant or experiences a slight decline. This strategy can help to mitigate downside risk and potentially enhance overall portfolio returns. However, it is worth noting that this approach also limits the potential upside potential of the portfolio in the event that the stock market experiences a significant rally.

When Stock Portfolio Managers Use Dynamic Asset Allocation by Writing