Pension fund ZZ has a large investment portfolio comprising bonds and equity. The trustees are concerned about a fall in value over the next year as economies worldwide emerge from the Covid-19 pandemic crisis. The trustees are considering two main strategies: Reduce equity price risk by lowering the beta of the equity portfolio. Purchase Credit Default Swaps (CDSS) to reduce credit risk in the bond portfolio. The equity portfolio is currently valued at $500 million and the S&P 500 index a) futures contract is trading at $445,000. The trustees have asked for the equity portfolio beta to be reduced from 1.45 to 0.90. Required: Calculate the number of S&P index futures required to change the equity portfolio beta from 1.45 to 0.90 and explain the rationale behind the formula and approach you use in this calculation.

Pension fund ZZ has a large investment portfolio comprising bonds and equity. The trustees are concerned about a fall in value over the next year as economies worldwide emerge from the Covid-19 pandemic crisis. The trustees are considering two main strategies: Reduce equity price risk by lowering the beta of the equity portfolio. Purchase Credit Default Swaps (CDSS) to reduce credit risk in the bond portfolio. The equity portfolio is currently valued at $500 million and the S&P 500 index a) futures contract is trading at $445,000. The trustees have asked for the equity portfolio beta to be reduced from 1.45 to 0.90. Required: Calculate the number of S&P index futures required to change the equity portfolio beta from 1.45 to 0.90 and explain the rationale behind the formula and approach you use in this calculation.

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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Formulate but do not solve the problem.The management of a private investment club has a fund of $200,000 earmarked for investment in stocks. To arrive at an acceptable overall level of risk, the stocks that management is considering have been classified into three categories: high-risk, medium-risk, and low-risk. Management estimates that high-risk stocks will have a rate of return of 16%/year; medium-risk stocks, 10%/year; and low-risk stocks, 6%/year. The investment in low-risk stocks is to be twice the sum of the investments in stocks of the other two categories. If the investment goal is to have an average rate of return of 9%/year on the total investment, determine how much the club should invest in each type of stock. (Assume that all the money available for investment is invested. Let x, y, and z denote the amount, in dollars, invested in high-, medium-, and low-risk stocks, respectively.) = 200,000 = z = .09(200,000)
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A university endowment fund has sought your advice on its fixed-income portfolio strategy. The characteristics of the portfolio's current holdings are listed below: Credit Maturity Coupon Modified Bond Rating (yrs.) Rate (%) Duration Convexity U.S. Govt. 3 2.724 9.9 A1 10 6.204 56.2 Aa2 5 3.704 18.7 Agency 7 4.798 32.1 Aa3 12 11.029 128.9 A B C D E Market Value of Position $34,000 34,000 34,000 34,000 34,000 $170,000 a. Calculate the modified duration for this portfolio (i.e., Mod Dp). Do not round intermediate calculations. Round your answer to three decimal places. years 0 10 12 11 0 b. Suppose you learn that the implied sensitivity (i.e., modified duration) of the endowment's liabilities is about 6.70 years. Identify whether the bond portfolio is: (1) immunized against interest rate risk, (2) exposed to net price risk, or (3) exposed to net reinvestment risk. The portfolio's duration is -Select- the liability's duration, portfolio is -Select-
A pension fund is investing $60 million in a well-diversified equity portfolio E and $30 million in a well-diversified bond portfolio B. Total assets under management (portfolio of E and B) has expected return of 8% and standard deviation of 5%. Recently, the fund acquired new capital of $10 million and will use it to invest in a Cryptocurrency portfolio C. C is known to have expected return of 12% and standard deviation of 10%. Also, it is known that the covariance between E and C is 0.8% and the covariance between B and C is 0.4%. What would be the expected return and the standard deviation of the total assets under management (portfolio of E, B and C) when the fund makes this new investment?
Your Company, manager of the Gigantic Mutual Fund, knows that her fund currently is well diversified and that it has a CAPM beta of 1.0 The risk-free rate is 8% and the CAPM risk premium of 6.2%. She has been learning about measures of risk and knows that there are (at least) two factors: changes in industrial production index, δ1 and unexpected inflation, δ2 The APT equation is E(Ri) – Rf = [δ1 – Rf]bi1 + [δ2 – Rf]bi2, E(Ri) = 0.08 + [0.05]bi1 + [0.11]bi2. Required If she rebalances her portfolio to keep the same expected return but reduce her exposure to inflation to zero (i.e., bi1= 0) what will its sensitivity to the first factor become?
Your client, Sandra is considering three assets: a bond mutual fund, a cryptocurrency ETF, and US Treasury bills. The annualized T-bill rate is 2%. The information below refers to the two risky assets. Expected return Standard deviation Bond mutual fund Cryptocurrency ETF 3% 10% Correlation coefficient 0 14% 20% (a) What are the proportions of each asset, in Sandra's optimal risky portfolio? (b) Suppose the return for each risky asset follows a normal distribution. What is the 1% value-at-risk for Sandra's optimal risky portfolio? Hint: P(Z<-2.326) = 0.01 where Z~N(0, 1).
(Security market line) Your father just learned from his financial advisor that his retirement portfolio has a beta of 1.83. He has turned to you to explain to him what this means. Specifically, describe what you would expect to happen to the value of his retirement fund if the following were to occur: a. The value of the market portfolio rises by 10 percent. b. The value of the market portfolio drops by 10 percent. c. Is your father's retirement portfolio more or less risky than the market portfolio? Explain. a. If the value of the market portfolio rises by 10%, then the value of your father's retirement fund should by%. (Select from the drop-down menu and round the answer to two decimal places.) decrease increase
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.
A pension fund manager is considering investing in two funds to be included in the pension plan’s current portfolio, which is a well-diversified portfolio as proxied by the Russell 3000 index. The first fund under consideration is a growth stock fund, the second a value stock fund. The expected return, standard deviation, standard deviation of residuals, and beta of the funds are as follows: Expected return Standard Deviation Beta Standard deviation of residuals Growth fund (G) 10% 20% 1.1 12% Value fund (V) 12% 12% 1.6 20% The correlation between the two fund returns is .80. The market risk premium is expected to be 6% and the risk-free rate is 1%. Determine and explain which fund should be included in the pension fund’s current portfolio. Justify your answers with a risk-adjusted performance measure and show all your work.
A mutual fund manager has a $20 million portfolio with a beta of 0.75. The risk-free rate is 3.75%, and the market risk premium is 7.0%. The manager expects to receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 12%. What should be the average beta of the new stocks added to the portfolio? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.
3. A fund manager invested $250,000 in Facebook and $350,000 in IBM at the start of 2021. By the end of 2021, Facebook and IBM shares have appreciated annually by 3% and 5%, respectively. a. b. C. 1 What is the initial value of the portfolio at the start of 2021? ) What is the value of the portfolio at the end of 2021? >What is the return of the portfolio in 2021?
Mr. Devine is a fixed-income portfolio manager. He forecast a cash outflow of $10 million in June and plans to sell his baseline bond portfolio. The fund currently is worth $10 million, has an “A” quality rating, duration of 7 years, weighted average maturity of 15 years, annual coupon rate of 10.25%, and YTM of 10.25% (note: the fund is selling at its par value). Suppose Mr. Devine is afraid that long-term interest rates could increase and decides to hedge his June sale by taking a position in June T-bond futures contracts when the June T-bond contract is trading at 80-16, and the T-bond most likely to be delivered on the contract has a YTM of 9.5%, maturity of 15 years, and a duration of 9 years （1）Using the price-sensitivity model, show how Mr. Devine could hedge his June bond portfolio sale against interest rate risk. （2）Suppose long-term interest rates increase over the period such that at the June expiration, Mr. Devine’s baseline portfolio (A-rated, 10.25% coupon rate, 15-year…

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