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QUESTION 4 (a) Assume that you have a $50m portfolio. The index futures are quoted at 1052 and the S&P 500 index is at. 1050.

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QUESTION 4 (a) Assume that you have a $50m portfolio. The index futures are quoted at 1052 and the S\&P 500 index is at. 1050. The portfolio's beta is 0.75. Assume that the value of one full index point is $250. a. You are worried that release of further bad news about inflation picking up in the US economy may reduce the value of your portfolio. How many index futures contracts would you need to hedge your portfolio? (3 marks) b. Assume, that two weeks after hedging, the markets fell by 2%. What is the gain or loss on the portfolio and futures? Assume no margin requirements and that futures price after the correction 1030 . (7 marks) a) Explain and calculate the Treynor Ratio and the Jensen measure for each portfolio shown above. Compare the rankings produced by each measure. Explain why the ranking is not consistent? (6 marks) b) Define the Sharpe Ratio. Under what circumstances will the Sharpe Ratio and the Treynor measure produce consistent rankings? (4 marks) (Total 20 marks) END OF QUESTION 4 SECTION B - Answer any TWO questions QUESTION 4 (a) Assume that you have a $50m portfolio. The index futures are quoted at 1052 and the S\&P 500 index is at. 1050. The portfolio's beta is 0.75. Assume that the value of one full index point is $250. a. You are worried that release of further bad news about inflation picking up in the US economy may reduce the value of your portfolio. How many index futures contracts would you need to hedge your portfolio? (3 marks) b. Assume, that two weeks after hedging, the markets fell by 2%. What is the gain or loss on the portfolio and futures? Assume no margin requirements and that futures price after the correction 1030 . (7 marks) a) Explain and calculate the Treynor Ratio and the Jensen measure for each portfolio shown above. Compare the rankings produced by each measure. Explain why the ranking is not consistent? (6 marks) b) Define the Sharpe Ratio. Under what circumstances will the Sharpe Ratio and the Treynor measure produce consistent rankings? (4 marks) (Total 20 marks) END OF QUESTION 4 SECTION B - Answer any TWO questions

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