1) Portfolio Beta Suppose you plan to invest $1 million in FB and GOOG ($500,000 in each)....
Question:
1) Portfolio Beta Suppose you plan to invest $1 million in FB and GOOG ($500,000 in each). Begin by estimating the beta of this portfolio using the five-year time series of monthly stock returns from August 2014 to August 2019 (inclusive). Use the S&P500 Composite Index as your proxy for the "market" (in the "Get Quotes" box type "^GSPC"), and for simplicity, you can assume a constant riskless rate (say, rf = 2%). You'll need to start with the price data provided under the "Historical Data" tab, and calculate monthly stock returns using the monthly adjusted closing prices.i Hint: Recall that a stock's beta is calculated as: the covariance between its excess returns and excess market returns, divided by the variance of excess market returnsi.e., i=Cov(rM,ri)/var(rM). ('excess return' refers to the return in excess of the riskless rate).
2) Hedging with Index Futures Suppose now that you would like to use S&P 500 Futures to hedge your portfolio against general market movements. What is your optimal hedge ratio? And how many contracts should you go long or short?