1. An investor holds a portfolio with a current value of $1,000,000 and a beta of 1.50.
Over the next year, the market gains 12%, the risk-free rate is 4% and there are no dividends.
According to CAPM, what is the expected return on the portfolio over the following year (answer in %)?
2. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on the S&P index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to achieve the following. (Indicate the number of contracts that should be traded and whether the position is long or short.)
(i) To eliminate all systematic risk in the portfolio the firm should
3. An investor holds a portfolio with a current value of $1,000,000 and a beta of 0.50. They decide to hedge systematic risk over the next year using futures contracts on the S&P 500 index. The current level of the index is 2,000 and the futures price is 2,060. Each futures contract is for delivery of $250 times the index. The investor goes short 1 contract to implement the hedge.
If the futures price increases to 2,266 in one year and the value of the investor's portfolio increases to $1,065,000, what is the total gain or loss for the investor?
A gain of $116,500
A loss of $116,500
A gain of $13,500
A loss of $13,500