When hedging an equity portfolio with stock index options, an increase in the beta of the portfolio will __________ the number of options needed to hedge the portfolio, all else the same.
A) Increase
B) Decrease
C) Not change
D) Increase only if the beta is less than one
E) Increase only if the beta is greater than one

Question

Quizplus · Accepted Answer

An increase in the beta of the portfolio indicates that the portfolio is becoming more volatile, meaning that its returns are becoming more closely tied to the returns of the overall market. As a result, more options are needed to effectively hedge against this increased level of risk. Therefore, an increase in the beta of the portfolio will increase the number of options needed to hedge the portfolio, all else the same.

When Hedging an Equity Portfolio with Stock Index Options, an Increase