On November 1, an analyst who has been studying a firm called Computer Sciences believes that the company will make a major announcement before the end of the year. Computer Sciences currently is priced at 27.63 and has a beta of 0.95. The analyst believes that the stock can advance about 10 percent if the market does not move. The analyst mm the market might decline by as much as 5 percent, leaving the stock with a return of 0.10 + (-0.05 x 0.95) = 0.0525. To capture the full 10 percent alpha, the analyst recommends the sale of a particular stock index futures. The March contract currently is priced at 393. Assume that the investor owns 100,000 shares of the stock. Set up a transaction by determining the appropriate number of futures contracts. Then determine the effective return on the stock if, on December 31, the stock is sold at 28.88, the futures contract 18' at 432.30, and the multiplier, is 500. Explain your results.

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
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  1. On November 1, an analyst who has been studying a firm called Computer Sciences believes that the company will make a major announcement before the end of the year. Computer Sciences currently is priced at 27.63 and has a beta of 0.95. The analyst believes that the stock can advance about 10 percent if the market does not move. The analyst mm the market might decline by as much as 5 percent, leaving the stock with a return of 0.10 + (-0.05 x 0.95) = 0.0525. To capture the full 10 percent alpha, the analyst recommends the sale of a particular stock index futures. The March contract currently is priced at 393. Assume that the investor owns 100,000 shares of the stock. Set up a transaction by determining the appropriate number of futures contracts. Then determine the effective return on the stock if, on December 31, the stock is sold at 28.88, the futures contract 18' at 432.30, and the multiplier, is 500. Explain your results.
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