You manage a $20.5 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 temporarily into T-bills, but you do not want to incur the transaction costs of liquidatingand reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with E-mini S&P 500 indexfutures contracts.a. Should you be long or short the contracts?ShortO Longb. 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$4100 and the contract multiplier is 50.Number of contractsc. How many contracts should you enter into if the beta of your portfolio is 0.6?Number of contracts

Answered: You manage a $20.5 million portfolio,…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are concerned about the market volatilfity but have found stocks that are attractively priced. In addition to cash, your portfolio will have securities both on the LONG and SHORT sides. You want to set up your LONG/SHORT portfolio with some constraints You will set aside 14.67% of the equity as a cash reserve to cushion any adverse margin changes and to pay any associated fees. You will maximize your buying and selling power (i.e. what you can purchase and sell on margin) using the remaining equity and loans from the broker. Your account's beginning equity is $222,990 all in cash before you start trading. You will set up your 100% beta-neutral trade on full margin, and the margin requirements are 50% on both sides. Assume that the LONG side has a weighted average beta of 0.59, while the SHORT side has a weighted average beta of 1.00. What is the value of your account's total liabilities immediately after you set up the portfolio? $254,361 $260,883 $267,406 $273,928 $280,450 Page 23…
You are concerned about the market volatifity but have found stocks that are attractively priced. In addition to cash, your portfolio will have securities both on the LONG and SHORT sides. You want to set up your LONG/SHORT portfolio with some constraints You will set aside 14.67% of the equity as a cash reserve to cushion any adverse margin changes and to pay any associated fees. You will maximize your buying and selling power (L.e. what you can purchase and sell on margin) using the remaining equity and loans from the broker. Your account's beginning equity is $222,990 all in cash before you start trading. You will set up your 100% beta-neutral trade on full margin, and the margin requirements are 50% on both sides. Assume that the LONG side has a weighted average beta of 0.59, while the SHORT side has a weighted average beta of 1.00. What is the value of your account's total liabilities immediately after you set up the portfolio? $254,361 $260,883 $267,406 $273,928 $280,450
Question: You are in charge of managing a $45.6 million equity portfolio and believe that the market is on about to witness a massive downturn. You are contemplating as to whether or not to move your portfolio temporarily into safe treasury bills and government bonds, but you do not want to incur the transaction costs of liquidating and re-establishing your equity position. Instead, you have decided to temporarily hedge your equity holdings with E-mini Dow Jones index futures contracts. a) Given the scenario, should you go long or should you short the contracts? Explain your position very briefly. b) The Dow Jones index is now at 1029. If your equity holdings are invested in a market-index fund, exactly how many contracts should you enter given that the contract multiplier is $325? (Round your answer to one decimal place). c) Explain and illustrate how does your answer to (b) is expected to change if the beta of your portfolio is 0.5, (if there are any changes that is).
You are concerned about the market volatility but have found stocks that are attractively priced. In additionto cash, your portfolio will have securities both on the LONG and SHORT sides. You want to set up your LONG/SHORT portfolio with some constraints. You will set aside 12.27% of the equity as a cash reserve to cushion any adverse margin changes and to pay any associated fees. You will maximize your buying and selling power (i.e. what you can purchase and sell on margin) using the remaining equity and loans from the broker. Your account's beginning equity is $201,290 all in cash before you start trading. You will set up your 100% beta-neutral trade on full margin, and the margin requirements are 50% on both sides. Assume that the LONG side has a weighted average beta of 1.35, while the SHORT side has a weighted average beta of 1.00. What is the value of your account's total liabilities immediately after you set up the portfolio? O $250,234 $257,185 $264,136 $271,087 $278,038
Suppose you are a seller . At time t = 0 you get £C from the buyer where C is the risk-neutral price of the option. You then have to design a hedging strategy which would allow you to meet your financial obligation in one year’s time. Your portfolio should consist of two investments: you are allowed to buy the underlying shares and to deposit money in the bank. The price of the share evolves according to a geometric Brownian motion. State the formulae you will need to compute the number of shares in the portfolio and the capital deposited in the bank at any time t, 0 ≤ t ≤ 1.
James had an equity portfolio that contains $40,000 investment in Tesla (TSLA) and $60,000 investment in Microsoft (MSFT) since 2018. After seeing the stock market turmoil sparked by coronavirus, he contacted you and seek for some approaches to measure the expected losses of his portfolio. As his investment adviser, you decided to use the model building approach to measure the risk of James’ portfolio. By how much does diversification reduce the VaR?
You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations. Round the final answers to the nearest whole number. Do not leave any empty spaces; input a O wherever it is required. Omit $ sign in your response.) Asset Stock A Stock B Stock C Risk-free asset Investment $197,000 $308,000 +A $ +A $ Beta 0.80 1.13 1.29
ou want to create a portfolio equally as risky as the market, and you have $900,000 to invest. Consider the following information: Asset Investment Beta Stock A $135,000 0.65 Stock B $270,000 1.35 Stock C 1.50 Risk-free asset Required: (a) What is the investment in Stock C? (Do not round your intermediate calculations.) (Click to select) $298,500 $167,500 $310,440 $283,575 $286,560 (b) What is the investment in risk-free asset? (Do not round your intermediate calculations.) (Click to select) $196,500 $188,640 $204,360 $327,500 $186,675
You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below: Asset Investment Beta Stock A $ 147,000 .92 Stock B $ 133,000 1.37 Stock C 1.52 Risk - free asset How much will you invest in Stock C? How much will you invest in the risk - free asset? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.
(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent. Stock Beta K 1.06 G 1.28 B 0.78 U 0.93 (Click on the icon in order to copy its contents into a spreadsheet.) a. Using the CAPM, what rates of return should Grace require for each individual security? b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4 percent and the market risk premium were to be only 6 percent? c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response. Question content area bottom Part 1 a. The expected rate of return for security K, which has a beta of 1.06, is enter your response here%. (Round to two decimal places.) Part 2 The expected rate…
Which one of the following is correct about security offerings? The costs of selling equity are less than the costs of selling debt. There are economies of scale in both equity and bond offerings. The Green Shoe option covers overallotments at the market price. The underwriting spread tends to be a constant percentage regardless of the offering size. One of the costs of an IPO is the abnormal return.
You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below: Asset Stock A Stock B Stock C Risk-free asset Investment, $ 141,000 $ 139,000 Beta .86 1.31 1.46 How much will you invest in Stock C? How much will you invest in the risk-free asset? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Investment in Stock C Investment in risk-free asset

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