Suppose that one year ago, you invested in a stock market portfolio, which is currently worth...

 

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Suppose that one year ago, you invested in a stock market portfolio, which is currently worth 62,000. You are convinced the portfolio is well-diversified and fitted to your profile as an investor, and the beta of your portfolio is 0.9. You are planning to hold this portfolio for at least another three years. Suppose that the current level of FTSE100 is 1850 and the risk-free interest rate is 1.5%. a) Can you identify any relevant risk that you may be facing in reference to your investment portfolio? b) Suppose there is a two-year FTSE100 futures contract available. The futures price is 1855, and one contract is for 10 times the index. How many contracts would you need to eliminate the exposure to the market over the next two years? What position in these contracts would you take today? c) Evaluate the outcomes of your hedging strategy if FTSE100 in two years is (1) 1842, or (2) 1871. Comment on your results. Suppose that one year ago, you invested in a stock market portfolio, which is currently worth 62,000. You are convinced the portfolio is well-diversified and fitted to your profile as an investor, and the beta of your portfolio is 0.9. You are planning to hold this portfolio for at least another three years. Suppose that the current level of FTSE100 is 1850 and the risk-free interest rate is 1.5%. a) Can you identify any relevant risk that you may be facing in reference to your investment portfolio? b) Suppose there is a two-year FTSE100 futures contract available. The futures price is 1855, and one contract is for 10 times the index. How many contracts would you need to eliminate the exposure to the market over the next two years? What position in these contracts would you take today? c) Evaluate the outcomes of your hedging strategy if FTSE100 in two years is (1) 1842, or (2) 1871. Comment on your results.

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a Relevant Risk One relevant risk that you may be facing in reference to your investment portfolio is market risk or systematic risk Market risk refer... View the full answer