For each question use the following data:

Suppose you manage a large equity portfolio. You are concerned that equities, as an asset class, are temporarily overvalued, so you implement a hedge, utilizing the S&P 500 index futures contract. Other important information is as follows:

Your equity portfolio is $100M and has a beta equal to 0.9.

The riskless rate is 4% per annum.

The S&P 500 index is currently equal to 2,000 and has a dividend yield of 2% per annum.

The S&P 500 index futures price is 2,013 with a multiplier of 250 (for delivery in four months);

Your hedge will be in place for three months.

You short 179 contracts to hedge the portfolio (rounded to the nearest integer).

Suppose that three months later, the S&P 500 index is 1900 and the S&P 500 index futures price is 1,903. Be prepared to respond to the following questions:

What is the cash flow associated with the futures position (and indicate positive or negative)?

What is the percent return on the S&P 500 market index (including dividends)?

What is the predicted percent return on the equity portfolio, as forecasted by the CAPM?

What percent return (approximately) would you expect to earn on the hedged equity portfolio (hint: you don't need the spreadsheet to answer this)?