7. You manage a $13.5 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 1,350 and the contract multiplier is $250.

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