What is the standard deviation of your portfolio

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Reference no: EM133491644

Case: You are responsible for a portfolio which you believe will beat the market over the next month. As part of your research, you estimate the index model using monthly data, and obtain the following result:

rp-rf = 0.75% + 1.5[rm-rf]

Your index model results also indicated that the standard deviation of the residuals is 5%.

The portfolio is worth $1,320,300, but there is concern that the market may fall in the coming month, which would adversely affect the anticipated abnormal returns. As a result, you have decided to hedge your portfolio's market exposure using S&P 500 e-mini futures contracts. The S&P 500 is currently at 1,467, and the contract multiplier is $50. Assume that the market rate of return is 8%p.a., and the risk-free rate of return is 2% p.a.

Required:

Question 1. How many contracts must you enter, in order to hedge your market exposure? In your answer, also indicate whether you should buy or sell the contracts

Question 2: What is the standard deviation of your portfolio, expressed as an annual figure, after hedging?

Question 3: What are the hedged proceeds from your portfolio, and your position in futures contracts, at the end of the next month?

Reference no: EM133491644

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