Final answer:
The portfolio makes a profit if the stock price is above $105. The put option secures against losses beyond $10 because it allows the stock to be sold at the strike price if the market drops below $95.
Step-by-step explanation:
To create a portfolio with a stock plus a put option such that the maximum loss is $10, you need to consider the cost of the put option and the circumstances under which the portfolio will make a profit. The put option has a strike price of $100 and costs $5. This means if you own the stock, you have the right to sell it for $100 regardless of the lower market price. If the market price of the stock falls below $95 (strike price minus option cost), then the put option will be exercised, and the maximum loss would be the cost of the option, which is $5. However, to limit the entire portfolio's loss to $10, you can only invest $5 in the stock (since you already spent $5 on the put option).
If the stock price remains above $95 at expiration, the option will expire worthless, but if the stock is held, its value will determine the total value of the portfolio. Only if the stock price is above $105 (cost of the stock plus the put option) will the portfolio start to make a profit. If the stock is anywhere between $95 and $105, there would be a net loss but limited to $10 at maximum due to the protective put. The profit scenario happens when the stock price rises significantly; on the other hand, if the stock's value declines beyond $95, losses are limited due to the put option's protective nature.