Assume that you manage a $1.3 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).

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Quizplus · Accepted Answer

To hedge a portfolio against market downturns, you would sell S&P 500 futures contracts. The number of contracts needed is determined by the formula: (Beta * Portfolio Value) / (Futures Price * Multiplier). Here, it's (1.45 * $1,300,000) / (1,220 * $250) = 4.63, which rounds to approximately 6 contracts for full coverage.

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