An investor manages a portfolio worth $167 million and the current value of the S&P 500 index
Question:
An investor manages a portfolio worth $167 million and the current value of the S&P 500 index is 1,000. The investor believes that the alpha of the portfolio is 1.1% per month and its beta is 1.5. The risk-free rate is 0.7% and S&P futures have a multiplier of $250.
Part 1
If the investor believes that the market is about to fall, and wants to capture the positive alpha, how many futures contracts should he sell in order to hedge his position for one month?
Part 2
What would be the expected rate of return of the market-neutral position?
Part 3
What is the value of the unhedged portfolio if the value of the residual turns out to be 0.48% and the market return in that month is 1.5% (in $ million)?
Part 4
What is the value of the hedged portfolio if the value of the residual turns out to be 0.48% and the market return in that month is 1.5% (in $ million)?
Intermediate Accounting
ISBN: 978-0071339476
Volume 1, 6th Edition
Authors: Beechy Thomas, Conrod Joan, Farrell Elizabeth, McLeod Dick I