An asset allocation mutual fund only considers putting its assets in stocks and money market instrument. The portfolio has a value of $100 millions. The fund invests in stock and money market instrument. The stock investment mirrors SP500 index. For practical purpose, the money market instrument earns no interest.
(a) The manager practices a constant mix asset allocation strategy with 70% in stock and 30% money market instrument. Recently, the SP500 index rises 10%. The manager begins to reallocate funds between the stock and money market accounts. Calculate the amount of funds moved. Be specific regarding the direction of funds moved.
(b) The manager practices a constant proportion portfolio insurance strategy. The risk parameter is 2 and the required floor value of the portfolio is $65 millions. Hence the current allocation of funds is 70% stock and 30% money market instruments. Recently, the SP500 index rises 10%. The manager begins to reallocate funds between the stock and money market accounts. Calculate the amount of funds moved. Be specific regarding the direction of funds moved.