Question

Imagine you are a portfolio manager who believes that value stocks would gain more than the S&P 500 Index, but you are concerned that both value stocks and the S&P 500 Index would lose during the next few weeks, such that you’ll lose money even if value stocks lose less than the S&P 500 Index. Imagine that today’s date is June 22nd. Vanguard Value Index fund shares are available at $39.57 per share. S&P 500 Index Mini futures expiring in September are available at 3,091, multiplied by $50, so the value of the contract is $154,550 Create a strategy combining one S&P 500 Index Mini futures contract with Vanguard Value Index fund shares that would benefit you if your belief is ultimately correct. Time has passed, and the date is August 10th. The S&P 500 Index Mini futures are now available at 3,184 and Vanguard Value Index fund shares are available at $41.55 per share. QUESTIONS a. Explain the rationale for your strategy. b. Did your strategy do what it was expected to do? c. How much money did your strategy make or lose? Use the template below to help you complete this assignment.

Answer 1

To create a strategy that would benefit you if your belief is ultimately correct, you can combine one S&P 500 Index Mini futures contract with Vanguard Value Index fund shares. By combining the futures contract and the Vanguard Value Index fund shares, you can benefit from your belief that value stocks would gain more than the S&P 500 Index, even if both lose value.

Step-by-step explanation:

To create a strategy that would benefit you if your belief is ultimately correct, you can combine one S&P 500 Index Mini futures contract with Vanguard Value Index fund shares. Here's how:

On June 22nd, buy one S&P 500 Index Mini futures contract for $154,550. This contract has a value of 3,091 multiplied by $50.

Buy Vanguard Value Index fund shares at $39.57 per share. You can decide how many shares you want to buy based on your budget.

On August 10th, the S&P 500 Index Mini futures are available at 3,184. Since you bought the futures contract at 3,091, you made a profit of 3,184 - 3,091 = 93 points. Each point is worth $50, so your profit from the futures contract is 93 * $50 = $4,650.

The Vanguard Value Index fund shares are now available at $41.55 per share. Calculate the difference in price from $39.57 to $41.55, and multiply it by the number of shares you bought to determine your profit from the shares.

By combining the futures contract and the Vanguard Value Index fund shares, you can benefit from your belief that value stocks would gain more than the S&P 500 Index, even if both lose value.