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Question 2. (10 points) You manage a portfolio of equity and fixed-income securities worth $80,000,000. You've identified four sources of risk for your portfolio -
Question 2. (10 points) You manage a portfolio of equity and fixed-income securities worth $80,000,000. You've identified four sources of risk for your portfolio - equity, interest rate, currency, and oil price risk. To evaluate your opportunities for hedging, you collect weekly price data and estimate the following regression: V,t=0+1SP500F,t+2TBondF,t+3EuroF,t+4Oilf,t+t where V,t is the weekly change in the value of your portfolio, and SP500F,t,TBBadF,t,Eur,t, , and Oiff,t, are the corresponding price changes for an S\&P 500 futures contract, a T-bond futures contract, a Euro futures contract, and an oil futures contract. The following table shows the regression results (the R2 is 0.847 ): (a) Suppose you want to optimally hedge your portfolio against all four sources of risk. Complete the following table to indicate how many S\&P 500 futures, T-bond futures, Euro futures, and oil futures contracts you should buy or sell. (b) What is the anticipated effectiveness of your hedge? Explain what this means. Question 2. (10 points) You manage a portfolio of equity and fixed-income securities worth $80,000,000. You've identified four sources of risk for your portfolio - equity, interest rate, currency, and oil price risk. To evaluate your opportunities for hedging, you collect weekly price data and estimate the following regression: V,t=0+1SP500F,t+2TBondF,t+3EuroF,t+4Oilf,t+t where V,t is the weekly change in the value of your portfolio, and SP500F,t,TBBadF,t,Eur,t, , and Oiff,t, are the corresponding price changes for an S\&P 500 futures contract, a T-bond futures contract, a Euro futures contract, and an oil futures contract. The following table shows the regression results (the R2 is 0.847 ): (a) Suppose you want to optimally hedge your portfolio against all four sources of risk. Complete the following table to indicate how many S\&P 500 futures, T-bond futures, Euro futures, and oil futures contracts you should buy or sell. (b) What is the anticipated effectiveness of your hedge? Explain what this means
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