A quantitative portfolio manager is very good at managing against the Russell 2000 Index. In fact, she is expected to achieve an B of 0.5% per month. Unfortunately, her benchmark is the S&P 500. She thus shorts the required amount of Russell 2000 Index futures and purchases an equivalent amount of S&P 500 Index futures contracts. Suppose that the S&P 500 is expected to have a return of 6% in the next month.

(a) What would be the expected return of her new portfolio?

(b) Would the realized return be similar? Explain.

Answer rating: 100% (QA)

a To calculate the expected return of the new portfolio we need to consider the contributions from m... View the full answer