Problem - You are required to construct 3 portfolios for a mutual fund: 1 pure equity portfolio (comprising of 10 equities from FTSE-100 index); 1 pure FOREX portfolio (comprising of 5 foreign exchange contracts, i.e. S/£, £/€, £/¥, $/¥ and €/¥) and 1 hybrid portfolio (comprising of 10 equities from FTSE-100 index and 5 foreign exchange contracts) between 2012 and 2015.
Using data from Bloomberg Terminal answer the following questions:
a. What criteria will you use to construct the three mutual fund portfolios?
b. How fundamentally different will the mark risk be for the three portfolios?
c. Will Triangular Arbitrage be an effective hedging technique for all three portfolios? Support your answer with relevant calculations
d. Explain the impact of asset betas on the volatility of your chosen portfolios.