Assume that you manage a $2 million portfolio that pays no dividends,has a beta of 1.25 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 1300.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).

Question

Quizplus · Accepted Answer

To hedge the portfolio, you need to sell futures contracts. The number of contracts is calculated as: (Portfolio Value * Portfolio Beta) / (S&P 500 Index Level * Multiplier). Here, it is ($2,000,000 * 1.25) / (1300 * $250) = 8 contracts.

Assume That You Manage a $2 Million Portfolio That Pays