Question
Allisons assistant has prepared the following summaries of each clients current situation, including any recent inquiries or requests from the client. Client A has a
Allisons assistant has prepared the following summaries of each clients current situation, including any recent inquiries or requests from the client.
Client A has a $20 million technology equity portfolio. At the beginning of the previous quarter, Allison forecasted a weak equity market and recommended adjusting the risk of the portfolio by reducing the portfolios beta from 1.20 to 1.05. To reduce the beta, Allison sold NASDAQ 100 futures contracts at $124,450 on 25 December. During the quarter, the market decreased by 3.5%, the value of the equity portfolio decreased by 5.1%, and the NASDAQ futures contract price fell from $124,450 to $119,347. Client A has questioned the effectiveness of the futures transaction used to adjust the portfolio beta.
(Hint: you have to compute the number of NASDAQ 100 contracts she sold)
4.) Show work. With respect to Client A, Allison's most appropriate conclusion is the futures transaction used to adjust the beta of the portfolio was:
A. ineffective because the effective beta on the portfolio was 1.28.
B. effective.
C. ineffective because the effective beta on the portfolio was 1.64.
Amy Allison is a fund manager at Gaels Securities. The third quarter ends today, and she is preparing for her quarterly review with her three largest U.S.-based clients. To complete her analysis, she has obtained the market data in Exhibit 1. tExhibit 1 Market Data As of 30 September Level of NASDAQ 100 Index 1223.14 Level of S&P 500 Index Price of December S&P 500 Index$245,750 futures contract Beta of Nasdaq 100 futures contract 1.00 Price of December U.S. Treasury$106,906 bond futures contract Implied modified duration of U.S. 6.87 Treasury-bond futures contract Macaulay duration of U.S. Treasury 7.05 bond futures contract 984.03Step by Step Solution
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