You run a 100m stock portfolio that has a beta of 150 the, Ask an Expert

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You run a $100M stock portfolio that has a beta of 1.50. The S&P 500 Index is currently at 1,600 and you expect the general market to be very volatile over the next six months. You are expecting to capture an alpha of 0.5% every month. The risk free rate is a monthly 0.5%. The return on the portfolio is expected to follow the CAPM formula. Assume there are no idiosyncratic factors affecting the stock price. That is you do not need to consider an error factor (e) in your results.

a) Using six month S&P 500 futures that have a multiplier of $250, how many 6 month future contracts would you need to trade to fully hedge the portfolio over 2 months?

b) If the S&P 500 Index was trading at 1,800 at the end of 2 months, show the detailed results of the hedged portfolio constructed in a) above

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Financial Management, Finance

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