You manage a $20.5 million portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidatingand reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with E-mini S&P 500 indexfutures contracts.a. Should you be long or short the contracts?ShortO Longb. If your equity holdings are invested in a market-index fund, into how many contracts should you enter? The S&P 500 index is now at$4100 and the contract multiplier is 50.Number of contractsc. How many contracts should you enter into if the beta of your portfolio is 0.6?Number of contracts

Answered: You manage a $20.5 million portfolio,…

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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Mark Washington, CFA, is an analyst with BIC One year ago, BIC analysts predicted that the U.S. equity market would experience a slight downturn and suggested delta-hedging the BIC portfolio. U.S. equity markets did indeed fall, but BIC's portfolio performance was disappointing, lagging its peer group by nearly 10%. Washington is reviewing the options strategy to determine why the hedged portfolio did not perform as expected BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of 0.69. How many call options should be written to make BIC's overall position delta-neutral? Should the calls be purchased or written? Number of call options The calls should be written
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Give typing answer with explanation and conclusion In futures markets a hedger: a. can be a funds manager and tries to realise risk-free returns taking advantage of price differentials between different markets b. Usually represents hedge funds and trying to implement sophisticated strategies to earn abnormal returns c. can buy and sell futures contracts multiple times during the day adding depth and liquidity to the markets d. can represent a superannuation fund and buys VIX futures anticipating high volatility in coming months
Suppose Rosa is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B C D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.00 4.50 7.00 9.50 12.00 If Rosa reduces her portfolio's exposure to risk by opting for a smaller share of stocks, she must also accept a Sell some of her bonds and use the proceeds to purchase stocks Accept more risk Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 Suppose Rosa currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the average annual return on her portfolio from 4.5% to 9.5%. In order to do she must do which of the following? Check all that apply. Sell…
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.
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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?
You want to create a portfolio equally as risky as the market, and you have $ 1,000,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations. Round the final answers to the nearest whole number. Do not leave any empty spaces; input a 0 wherever it is required. Omit $ sign in your response.) Asset Investment Beta Stock A $200,000 0.80 Stock B $ 305,000 1.13 Stock C $ 1.29 Risk - free asset Ś
Question: You are in charge of managing a $45.6 million equity portfolio and believe that the market is on about to witness a massive downturn. You are contemplating as to whether or not to move your portfolio temporarily into safe treasury bills and government bonds, but you do not want to incur the transaction costs of liquidating and re-establishing your equity position. Instead, you have decided to temporarily hedge your equity holdings with E-mini Dow Jones index futures contracts. a) Given the scenario, should you go long or should you short the contracts? Explain your position very briefly. b) The Dow Jones index is now at 1029. If your equity holdings are invested in a market-index fund, exactly how many contracts should you enter given that the contract multiplier is $325? (Round your answer to one decimal place). c) Explain and illustrate how does your answer to (b) is expected to change if the beta of your portfolio is 0.5, (if there are any changes that is).
You are holding call options on a stock. The stock’s beta is 0.86, and you are concerned that the stock market is about to fall. The stock is currently selling for $22 and you hold 1 million options (i.e., you hold 10,000 contracts for 100 shares each). The option delta is 0.95. How much of the market-index portfolio must you buy or sell to hedge your market exposure? Note: Enter your answer in dollar not in millions. please answer fast i give upvote
You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations. Round the final answers to the nearest whole number. Do not leave any empty spaces; input a O wherever it is required. Omit $ sign in your response.) Asset Stock A Stock B Stock C Risk-free asset Investment $197,000 $308,000 +A $ +A $ Beta 0.80 1.13 1.29
Question 1 e) As a risk averse investor Lawrence will only invest in the portfolio if it has a coefficient of variation that is below 0.75. Should Lawrence invest in the portfolio, please provide reason(s) to support your response? f) Assume in 2020 the estimated rate of return of the T&T Stock Exchange Composite Index for the upcoming year was 8%, and the estimated return on a 1-year treasury note for the upcoming year was 2%. Using the beta of each security shown in Table 1 above and the market expected returns calculate an expected rate of return for each security

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