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GMS Hedging Simulation

Joe Braveheart and Kate Torelli, security analysts for Lion-Fund, have both
identified a gold mining stock (ticker symbol GMS) as a particularly attractive,
albeit risky, investment. Currently GMS stock sells for $100

Joe Braveheart would like to invest in GMS Stock alone.

Kate Torelli is considering using put options to hedge against downside risk. She
called an options trader at a large investment bank for quotes. The prices for
three (European-style) put options are
Strike Price
Option Price
Put Option A
$95
$2.20
Put Option B
$100
$6.40
Put Option C
$105
$12.50
 Kate consider a portfolio with the following weights:
88% GMS, 2% Option A, 1% Option B, 9% Option C

Based on the analysis of historical returns, Joe and Kate assume that GMS
Stock return is normally distributed, with mean 2% and standard deviation
18.33%.

Evaluate Joe and Kate’s portfolios.