Assume that you manage a $2 million portfolio that pays no dividends and has a beta of 1.3 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1,500. 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, you would sell futures contracts if you expect the market to fall. The number of contracts needed to hedge the portfolio can be calculated using the formula: Number of contracts = (Beta * Portfolio Value) / (Futures Price * Multiplier). Here, it's (1.3 * $2,000,000) / (1,500 * $250) = 6.93, which rounds to approximately 7 contracts.

Assume That You Manage a $2 Million Portfolio That Pays