A company has a $10 million stock portfolio with a beta of 2.0 when measured against the S&P 500 stock index.

The index level is 7,792 and the dividend yield on the index is 4% annually compounded.

The futures price for a contract on the index with a delivery date in 6 months is 7,992.

Futures contracts on $250 times the index can be traded.

The risk free rate is 6% annually compounded.

Consider the following statements.

I. The futures contract is over-priced.

II. If the company wanted to reduce the stock portfolio's beta by 25%, it should sell 6 futures contracts.

Which of the following is correct?

a.

Statement I is incorrect, Statement II is correct.

b.

Statements I and II are correct.

c.

Statement I is correct, Statement II is incorrect.

d.

Statements I and II are incorrect.

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