Exhibit 21.8 Use the Information Below for the Following Problem(S)

question 16

Multiple Choice

Exhibit 21.8
Use the Information Below for the Following Problem(S)
Consider a portfolio manager with a $20,500,000 equity portfolio under management. The manager wishes to hedge against a decline in share values using stock index futures. Currently a stock index future is priced at 1250 and has a multiplier of 250. The portfolio beta is 1.25.
-Refer to Exhibit 21.8.Calculate the overall profit.

• A) $1,550,000
• B) -$2,000,000
• C) $2,050,000
• D) -$5,000,000
• E) $2,400,000

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Definitions:

Interest

Interest is the charge for the privilege of borrowing money, typically expressed as an annual percentage rate.

Rule of 70

A formula to estimate the number of years required to double the value of something at a constant growth rate, calculated as 70 divided by the growth rate.

Interest

The cost incurred for the benefit of borrowing funds, usually presented as a yearly percentage rate.

Risk Averse

The tendency of individuals to prefer certainty over uncertainty, avoiding risks where possible, especially in financial decisions.