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21. An investor has a well-diversified stock portfolio with a beta of 1.60. The current portfolio value is $5,300,000. The investor is looking to hedge
21. An investor has a well-diversified stock portfolio with a beta of 1.60. The current portfolio value is $5,300,000. The investor is looking to hedge the systematic risk in her portfolio. She intends to use the March 22 E-mini S&P 500 (ES) futures contract with a current price of 4,240 (and a multiplier of $50). a. If she were to choose a target beta equal to the market beta (the S&P 500 index, say), what proportion of her systematic risk would she be hedging, and how many ES contracts would she need to short? b. If she were to reduce her portfolio's exposure to systematic risk (beta) by 80%. What target beta does this imply and how many ES contracts would she short? C. Ultimately, she decides to short 26 of the ES futures contracts. The stock market may rise by up to 15% or decline by as much as 24%. Compute her total portfolio value for each of these two cases
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