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

The strategy combines a futures contract with value stocks to hedge against potential losses. The performance of the strategy needs to be evaluated by comparing it to the individual performance of the investments. The profit or loss of the strategy can be calculated by subtracting the initial investment value from the current value.

a. The rationale for the strategy is to create a hedge against potential losses in both value stocks and the S&P 500 Index. By combining one S&P 500 Index Mini futures contract with Vanguard Value Index fund shares, the portfolio manager can minimize potential losses if both value stocks and the S&P 500 Index decline.

If value stocks outperform the S&P 500 Index, the gains from the futures contract can help offset any losses in the value stocks.

b. To determine if the strategy did what it was expected to do, we need to compare the performance of the S&P 500 Index Mini futures contract and the Vanguard Value Index fund shares. If the combined strategy outperformed the individual performance of either investment, then it can be considered successful.

c. To calculate the amount of money made or lost by the strategy, we need to compare the initial prices of the investments with the prices on August 10th. Subtract the initial value of the investments from the current value to determine the profit or loss.