A fund manager has a USD 100 million portfolio with a beta of 0.75. The manager has bullish expectations for the next couple of months and plans to use futures contracts on the S&P500 to increase the portfolio´s beta to 1.8. Given the following information, which strategy should the fund manager follow.
b. Enter into a long position of 336 S&P futures contract
c. Enter into a long position of 480 S&P futures contracts
d. Enter into a short position of 240 S&P futures contracts
CORRECT: B
Since the desired beta (1.8) is greater than the current beta (0.75), a long position in S&P
futures contracts is needed. The number of contracts needed is:
(β* - β) * Portfolio_Value / Futures_Value = (1.8 - 0.75) * 100,000,000 / (1250 * 250)
= 336 contracts.
Hi all, in the first attempt, I set X as dollar amount of index, in order to make the total portolio increase to 1.8, so 0.75*100,000,000+1*X=1.8*(X+100,000,000), then X resolved to -$131,250,000, then 131250000/(1250*250), so my answer is d.
I used weighted avg beta, it seems like answer seems like not taking weighted average beta into consideration. Does anyone know the logic behind the official answer? why no weighted avg of beta? thanks.
- The current level of the S&P index is 1250
- Each S&P futures contract delivers USD 250 times the index
- The risk-free interest rate is 6% per annum
b. Enter into a long position of 336 S&P futures contract
c. Enter into a long position of 480 S&P futures contracts
d. Enter into a short position of 240 S&P futures contracts
CORRECT: B
Since the desired beta (1.8) is greater than the current beta (0.75), a long position in S&P
futures contracts is needed. The number of contracts needed is:
(β* - β) * Portfolio_Value / Futures_Value = (1.8 - 0.75) * 100,000,000 / (1250 * 250)
= 336 contracts.
Hi all, in the first attempt, I set X as dollar amount of index, in order to make the total portolio increase to 1.8, so 0.75*100,000,000+1*X=1.8*(X+100,000,000), then X resolved to -$131,250,000, then 131250000/(1250*250), so my answer is d.
I used weighted avg beta, it seems like answer seems like not taking weighted average beta into consideration. Does anyone know the logic behind the official answer? why no weighted avg of beta? thanks.
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