Suppose the S&P 500 currently has a level of 875. The continuously compounded return on a 1-year

Question:

Suppose the S&P 500 currently has a level of 875. The continuously compounded return on a 1-year T-bill is 4.75%. You wish to hedge an $800,000 portfolio that has a beta of 1.1 and a correlation of 1.0 with the S&P 500.

a. What is the 1-year futures price for the S&P 500 assuming no dividends?

b. How many S&P 500 futures contracts should you short to hedge your portfolio? What return do you expect on the hedged portfolio? Explain.

Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...