8. Alex Andrew, who manages a $95 million large-capitalization U.S. equity portfolio, cur-rently forecasts that equity markets will decline soon. Andrew prefers to avoid the trans-action costs of making sales but wants to hedge $15 million of the portfolio's currentvalue using S&P 500 futures.Because Andrew realizes that his portfolio will not track the S&P 500 Index exactly, heperforms a regression analysis on his actual portfolio returns versus the S&P futuresreturns over the past year. The regression analysis indicates a risk-minimizing beta of0.88 with a correlation coefficient of 0.96.Futures Contract DataS&P 500 futures price1,000S&P 500 index999S&P 500 index multiplier250a. Calculate the number of futures contracts required to hedge $15 million of Andrew'sportfolio, using the data shown. State whether the hedge is long or short. Show allcalculations.b. Identify two alternative methods (other than selling securities from the portfolio orusing futures) that replicate the strategy in part (a). Contract each of these methodswith the futures strategy.

Part a:We can determine the number of futures contracts required to hedge $15 million of the…

Answered: 8. Alex Andrew, who manages a $95…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 7MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...

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You manage a $19.5 million portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio tempo-rarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with E-mini S&P 500 index futures contracts.a. Should you be long or short the contracts? Why?b. If your equity holdings are invested in a market-index fund, into how many contracts should you enter? The S&P 500 index is now at 1,950 and the contract multiplier is $50.c. How does your answer to part (b) change if the beta of your portfolio is .6?
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed fall, but BIC’s portfolio performance was disappointing, lagging its peer group by nearly 10%. Washington is reviewing the options strategy to determine why the hedged portfolio did not perform as expected. Required: After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. He draws the value of an option as a function of the underlying stock price. In such a diagram, the option’s delta is the: a. Slope in the option price diagram b. curvature of the option price graph c. level of the option price
A street analyst is trying to conduct top-down research. In order to realign investment portfolio, he plans to remove the stock that has the lowest market share in its industry. He is currently looking at the following stocks: Stock Name: ABCRevenue: 2,345,678.00Industry Sales: 27,000,579.88 Stock Name: DEFRevenue: 278,000.00Industry Sales: 2,897,000.90 Stock Name: GHIRevenue: 1,334,567.00Industry Sales: 8,700,899.76 Stock Name: JKLRevenue: 4,400,990.00Industry Sales: 6,678,999.00 Stock Name: MNORevenue: 13,000,000.00Industry Sales: 87,994,678.00 Which stock will he remove?
A client of ZBX Financial Planning is considering a shift in her portfolio holdings. Given recent stock market declines she is considering a weight of 75% in QQQ (a Nasdaq index) and the remainder in AGG (a corp bond index). Currently the beta of QQQ is 2.0 and the beta of AGG is 0.6, the overall market index has an expected return of 12%, and the risk-free rate is 4%. (i) What will be the E(R) of the client's portfolio according to the CAPM? (ii) Above we used the CAPM to estimate an expected return of a portfolio. How can the CAPM be useful for the estimation of an investment's NPV?
You currently own $100, 000 worth of Wal-Mart stock. Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%. The market portfolio has an expected return of 12% and a volatility of 16%. The risk free rate is 5%. Required: Assuming the CAPM assumptions hold, what alternative investment has the highest possible expected return while having the same volatility as Wal-Mart? What is the expected return of this portfolio? ......(Do not provide solution in image and AI based).....
A hedge fund has created a portfolio using just two stocks. It has shorted $34,000,000 worth of Oracle stock and has purchased $77,000,000 of Intel stock. The correlation between Oracle's and Intel's returns is 0.63. The expected returns and standard deviations of the two stocks are given in the following table below. Suppose the correlation between Intel and Oracle's stock increases, but nothing else changes. Would the portfolio be more or less risky with this change?
You have $122,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 17.6 percent. Stock X has an expected return of 14.0 percent and a beta of 1.26, and Stock Y has an expected return of 9.5 percent and a beta of 1.00. a. How much money will you invest in Stock Y? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the beta of your portfolio?
Liu Industries is a highly levered firm. Suppose there is a large probability that Liu will default on its debt. The value of Lius operations is 4 million. The firms debt consists of 1-year, zero coupon bonds with a face value of 2 million. Lius volatility, , is 0.60, and the risk-free rate rRF is 6%. Because Lius debt is risky, its equity is like a call option and can be valued with the Black-Scholes Option Pricing Model (OPM). (See Chapter 8 for details of the OPM.) (1) What are the values of Lius stock and debt? What is the yield on the debt? (2) What are the values of Lius stock and debt for volatilities of 0.40 and 0.80? What are yields on the debt? (3) What incentives might the manager of Liu have if she understands the relationship between equity value and volatility? What might debtholders do in response?
You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: What is the Capital Asset Pricing Model (CAPM)? What are the assumptions that underlie the model? What is the Security Market Line (SML)?
You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a particular portfolio efficient? Don’t worry about specific values when constructing the graph—merely illustrate how things look with “reasonable” data.
You hold a $400 million portfolio of 30 large stocks in various sectors within the S&P500. You are considering switching some of this into stock in a listed shell company (a company whose only assets are cash). In terms of minimising your overall systematic portfolio risk measured by the weighted beta of your portfolio, which option is the most likely to reduce your portfolio’s systematic risk?（No information missing） a Reallocating $50m into the shell company. b I do not want to answer this question. c Reallocating $25m into the shell company and $25m into airline stocks. d Reallocating $50 million into airline stocks. e Remaining fully invested in the S&P500. f Reallocating $100m into airlines stocks.
I am having trouble solving this problem. Can you please provide me with some help? Thank you. I appreciate it. You estimate that the expected return of SPY stock is 15%, and standard deviation of the stock is 35%. The expected return of GLD is -2%, and standard deviation of the stock is 10%. If the correlation between SPY returns and GLD returns is -10%, what is the expected return and standard deviation of a portfolio with $5,000 invested in NFLX and $5,000 invested in DIS?

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