You manage a $16.5 million portfolio, currently all invested in equities, and believe that the market is

Question:

You manage a $16.5 million portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with S&P 500 index futures contracts.

a. Should you be long or short the contracts? Why?

b. If your equity holdings are invested in a market-index fund, into how many contracts should you enter? The S&P 500 index is now at 1,650 and the contract multiplier is $250.

c. How does your answer to ( b ) change if the beta of your portfolio is .6?

Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...