Question

John Q. Investor manages an equity portfolio with a market value of $3,000,000. The portfolio beta is 1.6. John Q. finds this somewhat overly aggressive for the client's risk profile and sells 25 DJIA futures contracts. The contract is defined as $10 times index and is currently trading at 15379. John Q. anticipates that this hedge will reduce the portfolio beta to ___?

Answer 1

Portfolio Beta = 1.2815

Step-by-step explanation:

given data

market value = $3,000,000

portfolio beta = 1.6

sells = 25

times index = $10

currently trading = 15379

to find out

anticipates that this hedge will reduce the portfolio beta to

solution

we get number of contract to sell is here

number of contract to sell = Portfolio Beta ×
`(Portfolio\ value)/(index\ value\ * multiplier)` ......................1

put here value we get

25 = Portfolio Beta ×
`(3,000,000)/(15379 * 10)`

solve it we get

Portfolio Beta = 1.2815