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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Top-Notch Conservative Ltd is a pension fund managing the portfolios of people saving for the later years of their lives. As such, it prides itself on delivering low but reliable returns on investment, which consist of 70% of government bonds, 10% equity, and 20% real estate.Ernest Blue, its newly appointed CEO, is trying to maintain the fund’s good reputation. The high volatility of the real estate portion of the fund, however, worries him. Help Ernest design a hedging strategy, employing options while not buying or selling any assets. Also, examine the fund’s portfolio strategy and assess real estate investments, valuations, and the risks to which it might be exposed.
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)
You can assume that an Exchange-Traded Fund uses a value-weighted momentum strategy of buying winners and short-selling losers, and limits the universe to large & mid-cap stocks in order to reduce transactions costs. The fund does not use any other tools to mitigate transaction costs. In this case, what is the optimal rebalancing frequency for the momentum strategy? O A. Daily O B. Weekly OC. Monthly O D. Quarterly O E. Semi-annually OF. Annually O G. Momentum is a long-term strategy that does not need to be rebalanced every year.
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?
A pension fund currently has $50 million in the S&P 500 index and $50 million in Treasury bills (risk-free asset). The current 6-month S&P 500 futures price is 1390.5, and one contract is on $250 times the index. a) Suppose that the manager is concerned about the performance of the index over the next 6 months. Explain what position in the S&P 500 futures he should take to eliminate all exposure to the market over the next six months. b) If the manager decides to switch to a portfolio that invests 30% in the index and 70% in T-bills for a period of 6 months, explain how he could achieve that using S&P 500 futures.
Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $49. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.1%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2020 (figures in percent per year) are as follows. Portfolio Average Annual Rate of Return (%) Average Premium (Extra return versus Treasury bills) (%) Treasury bills 3.7 Treasury bonds 5.4 1.7 Common stocks 11.5 7.7 What is the discount rate on the stock? Note: Enter your answer as a percent rounded to 2 decimal places. What price should she be willing to pay for the stock today? Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
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?
(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.
You are considering buying stock in the following two banks. Each of the banks has assets that are solely long-term corporate bonds. Bank One is financed by 10% equity and 90% deposits. Bank Two is financed by 25% equity and 75% deposits. Which of the following scenarios would lead to the best outcome for Bank One relative to Bank Two? Higher inflation A recession Improving corporate credit ratings

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