Asked by Ashley Armstrong on Jul 22, 2024
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Assume that you manage a $3 million portfolio that pays no dividends and has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1,220. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250) .
A) selling 1
B) selling 14
C) buying 1
D) buying 14
E) selling 6
S&P 500 Futures Contracts
Financial contracts that speculate on the future value of the S&P 500 index, allowing for hedging and investment strategies based on the anticipated market direction.
Beta
A gauge of the systematic risk or volatility of a security or a portfolio relative to the overall market.
Risk-Free Rate
The theoretical rate of return on an investment with no risk of financial loss, often represented by government bonds.
- Comprehend the principles of alpha and beta within the framework of hedge fund effectiveness and risk mitigation.
- Acquire knowledge on the approaches hedge funds take towards hedging and leveraging within investment tactics.
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Learning Objectives
- Comprehend the principles of alpha and beta within the framework of hedge fund effectiveness and risk mitigation.
- Acquire knowledge on the approaches hedge funds take towards hedging and leveraging within investment tactics.
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