Question: An investment management firm wishes to decrease the beta of one of its portfolios under management from 1.15 to 0.65 for a five-month period. The
An investment management firm wishes to decrease the beta of one of its portfolios under management from 1.15 to 0.65 for a five-month period. The portfolio has a market value of $200,000,000. The investment firm plans to use a futures contract priced at $102,500 in order to adjust the portfolio beta. The futures contract has a beta of 1.02.
A) Calculate the number of futures contracts that should be bought or sold to achieve a decrease in the portfolio beta.The number of the contracts should be a whole number.
B) At the end of 5 months, the overall equity market is down by 3.5%. The stock porfolio under management is down by 4.025%. The futures contract is priced at $98,840.75. Calculate the value of the overall position and the effective (realized or ex post) beta of the portfolio.
| t=0 | t=5 mo | ||
| S= | $200,000 | -4.025% | |
| Beta(stock)= | 1.15 | ||
| Beta(tgt)= | 0.65 | ||
| Beta(fut)= | 1.02 | ||
| f= | $102,500 | $98,840.75 | |
| CHG(mkt)= | 1% | -3.50% | |
| A) | No of contract? | ||
| Short or long? | |||
| B) | Value of position? | ||
| Effective beta? |
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
Study Help