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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Definitions:

Materials Price Variance

Materials price variance is the difference between the actual cost of materials used in production and the expected (or standard) cost, indicating efficient materials purchasing.

AQ × AP

Represents the multiplication of the Actual Quantity (AQ) by the Actual Price (AP), often used in financial and operational analyses.

Total Variance

The overall difference between planned or standard costs and the actual costs incurred.

Total Labor Variance

The difference between the actual cost of labor and the budgeted or standard cost of labor over a period.