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An investor owns a $250,000 equity portfolio with a beta of 1.25. The S&P 500 index...

An investor owns a $250,000 equity portfolio with a beta of 1.25. The S&P 500 index is currently 2,000, the risk-free interest rate is 4% per annum, and the dividend yield on the index is 2% per annum.

(a) If the index increases to 2,200 over the next six months, what is the expected percentage return on the equity portfolio?

(b) Futures contracts (for 100 times the index) are currently priced at 2,100. How could the investor hedge the portfolio to essentially eliminate market risk?

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