Assume That You Are a Mutual Fund Manager with a Total

question 122

Essay

Assume that you are a mutual fund manager with a total portfolio value of $100 million.You estimate the beta of the fund to be 1.25.You would like to hedge against market movements by using stock index futures.You observe that the S&P 500 June futures are selling for 260.15 and that the index is at 256.90.
a. How many stock index futures would you have to sell to protect yourself against market risk?
b. If the riskless rate is 6% and the market risk premium is 8%, what return would you expect to make on the mutual fund (assuming you don't hedge)?
c. How much would you expect to make if you hedge away all market risk?

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