When Hedging an Equity Portfolio with Stock Index Options, an Increase

question 78

Multiple Choice

When hedging an equity portfolio with stock index options, an increase in the beta of the portfolio will __________ the number of options needed to hedge the portfolio, all else the same.

• A) Increase
• B) Decrease
• C) Not change
• D) Increase only if the beta is less than one
• E) Increase only if the beta is greater than one

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Definitions:

Accounting Rate of Return

The rate of return anticipated on an investment in terms of accounting income, typically used to evaluate the profitability of a project or investment.

Financial Accounting Statements

Formal records of the financial activities and position of a business, person, or other entity, typically including the balance sheet, income statement, and statement of cash flows.

Payback Period

The length of time required to recover the cost of an investment, calculated by dividing the initial investment by annual cash inflow.

Initial Investment

The initial sum of money spent on starting a project, purchasing an asset, or establishing a business venture.