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What are the sources of risk to an investor who uses stock index futures to hedge...

What are the sources of risk to an investor who uses stock index futures to hedge an actively managed stock portfolio?

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Answer #1

The types of risk generally available to an investor which uses stock index futures to hedge an actively managed stock portfolio:

(i) Systematic Risk: Systematic risk is the risk that relates to overall market fluctuations. It does not pertain to belong to a particular firm or an industry. It refers to volatility of a stock on a day to day basis.

(i) Unsystematic risk: This type of risk refers to the risk that is particular to a group of firms and is not dependent on the market movements.This may be as a result of legal regulations relevant to a particular industry or weak demand and the like.

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