8. Alex Andrew, who manages a $95 million large-capitalization U.S. equity portfolio, cur-rently forecasts that equity markets will decline soon. Andrew prefers to avoid the trans-action costs of making sales but wants to hedge $15 million of the portfolio's currentvalue using S&P 500 futures.Because Andrew realizes that his portfolio will not track the S&P 500 Index exactly, heperforms a regression analysis on his actual portfolio returns versus the S&P futuresreturns over the past year. The regression analysis indicates a risk-minimizing beta of0.88 with a correlation coefficient of 0.96.Futures Contract DataS&P 500 futures price1,000S&P 500 index999S&P 500 index multiplier250a. Calculate the number of futures contracts required to hedge $15 million of Andrew'sportfolio, using the data shown. State whether the hedge is long or short. Show allcalculations.b. Identify two alternative methods (other than selling securities from the portfolio orusing futures) that replicate the strategy in part (a). Contract each of these methodswith the futures strategy.

Part a:We can determine the number of futures contracts required to hedge $15 million of the…

Answered: 8. Alex Andrew, who manages a $95…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Your client has $102,000 invested in stock A. She would like to build a two-stock portfolio by investing another $102,000 in either stock B or C. She wants a portfolio with an expected return of at least 14.0% and as low a risk as possible, but the standard deviation must be no more than 40%. What do you advise her to do, and what will be the portfolio expected return and standard deviation? Expected Return Standard Deviation Correlation with A A B с 15% 13% 13% 47% 40% 40% Part 1 of 5 The expected return of the portfolio with stock B is 1.00 0.11 0.32 %. (Round to one decimal place.)
Alice's portfolio consists solely of an investment in Merrill stock. Merrill has an expected return of 13% and a volatility of 18%. The market portfolio has an expected return of 12% and a volatility of 25%. The risk-free rate is 4%. Assume that the CAPM assumptions hold in the market. Assuming that Alice wants to maintain the current expected return on his portfolio, then the amount that Alice should invest in the market portfolio to minimize his volatility is closest to: Select one: O A. 110% O B. 90% C. 125% D. 100%
Ebenezer Scrooge has invested 65% of his money in share A and the remainder in share B. He assesses their prospects as follows: A B Expected return (%) 16 21 Standard deviation (%) 23 27 Correlation between returns 0.5 What are the expected return and standard deviation of returns on his portfolio? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. How would your answer change if the correlation coefficient were 0 or −0.50? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Is Mr. Scrooge’s portfolio better or worse than one invested entirely in share A, or is it not possible to say?
Kindly solve it ASAP Two portfolio managers, Mr. P and Mr. Q, claim that they are both good at picking under-priced stocks. Over the years, the average return on the portfolio managed by Mr. P has been 17%, with standard deviation 15%, while the average return of Mr. Q's portfolio has been 18%, with standard deviation 17%. Over the same period, the average return on the market portfolio has been 15%, with standard deviation 12%. You estimate that the covariance between Mr. P's portfolio and the market has been sPM=0.0173, while the covariance between Mr. Q's portfolio and the market has been sQM=0.0202. Finally, you estimate that the average return on money market funds (a proxy for the risk-free rate of return) has been 5%. a. Compute the expected returns on Mr. P's and Mr. Q's portfolios that would be consistent with Market Model (ie: alpha equals zero under the Market Model). b. Given the Market as the benchmark, are either of the two managers over-performing the market?…
You are managing a pension fund with a value of $360 million and a beta of 1.30. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many contracts do you need if the delta of the call option is 0.64 and the S&P index is currently at 3, 300 ? Note: Do not round intermediate calculations. A negative value should be indicated by a minus sign. Round your answer to the nearest whole number.
Top-down research is being attempted by a street analyst. He intends to eliminate the stock with the lowest market share in its industry from his investment portfolio in order to realign it. Currently, he is considering the following stocks: Stock Name: ABCRevenue: 2,345,678.00Industry Sales: 27,000,579.88 Stock Name: DEFRevenue: 278,000.00Industry Sales: 2,897,000.90 Stock Name: GHIRevenue: 1,334,567.00Industry Sales: 8,700,899.76 Stock Name: JKLRevenue: 4,400,990.00Industry Sales: 6,678,999.00 Stock Name: MNORevenue: 13,000,000.00Industry Sales: 87,994,678.00 What stock is he going to get rid of?
CAN I GET HELP as soon as possible please Explain your answer for each of them. Show all your work. The required return on ABC stock is 14%. The risk-free rate of return is 4% and the real rate of return is 2%. How much are investors requiring as compensation for risk? A) 8% B) 10% C) 12% D) 14% The efficient market hypothesis suggests thatA) investors should not try to outguess the market by constantly buying and selling securities. B) investors do better on average if they adopt a "buy and hold" strategy.C) buying into a mutual fund is a sensible strategy for a small investor.D) all of the above are sensible strategies.E) only A and B of the above are sensible strategies.
1. You are trying to plan your investments for the next year. You havedecided that the market will either be strong (a bull market), weak (abear market) or normal. You think that stocks, bonds, and bills will earn the following retruns in these secnarios:You have also decided that you have a risk-aversion (A) of 8. (a) What is the expected return for each of the securities?(b) What is the volatility of each security return?(c) What is the covariance between stock and bond returns?
7. Diversification and risk The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the portfolio for a hypothetical stock market. RISK (Standard deviation of portfolio return) 60 20 01 4 True 10 20 30 NUMBER OF STOCKS IN PORTFOLIO True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk. False 40 ?
Don't provide handwritten solution. Suppose Company A's stock return has a volatility of 50% and its correlation with the Market Portfolio is 80%. The expected return on the Market Portfolio is 7%, the volatility of the Market Portfolio is 20%, and the riskfree interest rate is 1%. Calculate the expected rate of return on the stock of Company A. Type your answer below, in percentage terms rounded to the nearest whole percent (e.g., 8.05% would be written as 8)
Bernie is a stock analyst at JP Mortgage. He uses CAPM to estimate if Magma (MGMA) stock is trading cheap or expensive relative to CAPM's prediction. The risk free rate is 4.00%, the market expected return is 14%, and Magma's Beta 1.5. MGMA stock is trading at a price consistent with an expected return of 21%. Please mark the only INCORRECT statement about MGMA stock. = MGMA's is trading expensive, therefore the trading desk should go SHORT MGMA b. MGMA's alpha is +2.00% C. MGMA is trading cheap relative to its fundamental value d. Bernie should recommend the trading desk to GO LONG MGMA's a.
Elsi is a risk-averse investor. She has invested 60% of her investment in share A and all the remainder in share B. Below are projections for the shares as well as the market. A В Market Expected return (%) Standard deviation (%) 10 30 20 40 70 30 Correlations A 1 0.2 1 Market 0.3 0.68 1. Required: a) What are the expected return and standard deviation of returns on the portfolio? b) The correlation between A and B is expected to be -1, what proportion should Elsi invest in A in order to form a minimum variance portfolio? Assume that she will invest only in A and B. c) Elsi is wondering if beta is a more appropriate risk measure for the shares. Explain when beta is a more appropriate measure of risk than standard deviation. d) Calculate the beta of A and B. Construct a portfolio for Elsi. The portfolio will consist of shares A and B and have the same level of systematic risk as the market. e) i) What will be the expected return and standard deviation of returns on the portfolio? ii)…

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