You are the manager of a stock portfolio worth $10,500,000. It has a beta of 1.15. During the next three months, you expect a correction in the market that will take the market down about 5 percent; thus, your portfolio is expected to fall about 5.75 percent (5 percent times a beta of 1.15). You wish to lower the beta to 1. A particular stock index futures contract with the appropriate expiration is priced at 425.75 with a multiplier of $500.
a. Should you buy or sell futures? How many contracts should you use?
b. In three months, the portfolio has fallen in value to $9,870,000. The futures has fallen to 402.35. Determine the profit and portfolio return over the quarter. How close did you come to the desired result?