Hello,
So I was doing my Finance homework, then I realized i’m so ignorant on this subject. Would someone help me out?
Very appreciate for your help!!!
1. As a portfolio manager, you decide to decrease the beta of your portfolio of common stocks.
We do not discuss why this may be a good thing or not, let us say that the management
company that you work for asks you to temporarily decrease the “market” risk of your
portfolio and you must do it. As a graduate from the Whitman School, you manage a Value
Fund whose beta is 1.5. The mark-to-market value of your portfolio at March 10, 2009 is
$1,345,000,000. Since your portfolio is large you choose to use the S&P500 futures market
for its depth and liquidity; i.e. you can take large positions without moving the market. Your
target beta is 0.80 for the next three months, and the beta of the futures (whichever you
choose) is 1.05.
2. Go to the CME Group web site and find the S&P 500 contract specifications. Specifically,
find whatever you need to calculate the notional value for the regular (not mini) S&P500
contract. Write down only the relevant information as the answer to this section and explain
your answer in no more than 2 lines.
3. Use the closing futures price as of March 10 for your calculations (use your own imagination
and resources to find this price). Which futures contract (expiration month and year) would
you use and why? What is the futures price for this contract on March 10? What is the notional
value of this contract on March 10?
a. The June contract which expires on the third Friday of June or June 19. It overlaps the three month
period over which I have to reduce the beta of my portfolio.
b. 713.1
c. 713.1 x 250 = 178,275
4. Briefly explain what you have to do to reduce the beta of your portfolio and show your
calculations.
5. Three months from March 10, your portfolio mark-to-market value is $1,123,000,000 and the
S&P 500 futures price decreases 12%. What is the mark-to-market value of your portfolio,
when you include your position in the futures? What was the rate of return of this portfolio
over the three month period?
6. Over the three month period, what was the effective beta of your portfolio? Show your work.