You manage a $ 13.5 million portfolio, currently all invested in equities, and believe that you have
Question:
You manage a $ 13.5 million portfolio, currently all invested in equities, and believe that you have extraordinary market- timing skills. You believe that the market is on the verge of a big but short- lived downturn; you would move your portfolio temporarily into T- bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with S& P 500 index futures contracts.
a. Should you be long or short the contracts? Why?
b. If your equity holdings are invested in a market index fund, into how many contracts should you enter? The S& P 500 index is now at 1,350 and the contract multiplier is $ 250.
c. How does your answer to (b) change if the beta of your portfolio is .6?
PortfolioA 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...
Step by Step Answer:
a You should be short the index futures contracts If the stock value falls you need futures ...View the full answer
Investments
ISBN: 978-0071338875
8th Canadian Edition
Authors: Zvi Bodie, Alex Kane, Alan Marcus, Stylianos Perrakis, Peter
