Question

17. If an equity portfolio manager wished to increase the systematic risk of the equity portfolio it could be done by

Select one:

a. Selling futures contracts on a stock index.

b. Selling Treasury bond futures contracts.

c. Purchasing futures contracts on a stock index.

d. Purchasing Treasury bond futures contracts.

e. None of the above.

18. Calculate the required rate of return on equity based on the
following information.

From year 2013 onward growth in FCFE is expected to remain constant
at 5% per year. The stock has a beta of 1.1 and the current market
price is $80. Currently the yield on 3-month Treasury bills is 5%
and the equity market risk premium is 4%. The firm can raise debt
at a pre-tax cost of 9%. The tax rate is 25%. The proportion of
equity is 55% and the proportion of debt is 45%.

Select one:

a. 8.2%

b. 9.4%

c. 9.0%

d. 10.3%

e. 7.3%

Answer #1

17. Systematic risk is also known as the market risk. This can be increased by purchasing futures contracts on a stock index. The stocks in the index are exposed to the market risk. Option C is correct

Option a is incorrect because selling futures contracts on a stock index decreases the systematic risk

Options b and d are incorrect because Purchasing or Selling Treasure bond futures contract will not have any effect on the systematic risk of the equity portfolio.

18. We need to find the required return on equity to be used to discount FCFE

CAPM

re = 0.05 + 1.1 * 0.04

re = 0.05 + 0.044

re = 0.094

re = 9.4%

Option b is correct

The systematic risk of a
portfolio containing a stock and a bond, reflects
a measure of the correlation between the _______
and the __________.
A: the stock/bond portfolio and the stock/bond market
indexes
B: the bond and the bond market index
C: the stock market index and the bond market index
D:the stock and the stock market index
E: the stock and the bond

Since it states that systematic risk cannot be eliminated,
modern portfolio theory does not allow for stock index futures
contracts.
In the real-world, financial decisions are irrelevant, so there
is really no reason for firms to hedge.
True or False

An investor wants to minimize market risk on a $50 million stock
portfolio by using futures for hedging. The portfolio’s beta with
respect to the S&P 500 equity index is 1.25. The current index
futures quote is 2,875 and each contract is for delivery of $250
times the index.
a. What futures position should the investor open to execute the
hedge? Long or short?
b. How many index futures contracts does the investor need to
use to minimize market risk?...

In early March an insurance company portfolio manager has a
stock portfolio of $500 million with a portfolio beta of 1.20. The
portfolio manager plans on selling the stocks in the portfolio in
June to be able to pay out funds to policyholders for annuities,
and is worried about a fall in the stock market. In April, the CME
Group S&P 500 mini= Futures contract index is 2545 for a June
futures contract ($50 multiplier for this
contract).
a. What...

An equity fund manager has a portfolio of stocks worth USD 170
million. The beta of the portfolio is 1.0. In early July, the fund
manager would like to use September futures contract on the S&P
500 to change the beta of the portfolio to 2.0. The index futures
price is 1,000 and each contract is on USD 250 times the index.
Which of the following statements is most accurate?
Group of answer choices
The fund manager needs to long...

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...

A fund manager wishes to insure the minimum value of their stock
portfolio against a fall in the value of the ASX 200 market index,
but retain potential for a gain should the market index rise. Which
of one the following option positions is best suited for their
hedging needs?
Select one:
a. Sell put options on the ASX 200 index.
b. Buy put options on the ASX 200 index.
c. Sell futures contracts on the ASX 200 index.
d....

A funds manager, Prudential Investments Limited, manages a
diversified Australian share portfolio, but is concerned that stock
prices in the market will fall over the next three months. The
manager decides to hedge the risk by selling 100 All Ordinaries
Share Price Index futures contracts at 2355. Three months later
when the manager closes out the position the contract is trading at
2410. Calculate the profit or loss position of the futures
transactions.

A fund manager has a portfolio worth $100 million with a beta of
0.88. the manager is concerned about the performance of the market
over the next 2 months and plans to use 3-month futurescontracts on
the S&P 500 to hedge the risk. The current level of the index
is 2600, one contract is on 250 times the index, the risk free rate
is 3% per annum, and the dividend yield on the index is 2% per
annum.
(a) Calculate...

Neon Corporation’s stock returns have a covariance with the
market portfolio of .0495. The standard deviation of the returns on
the market portfolio is 20 percent, and the expected market risk
premium is 8.3 percent. The company has bonds outstanding with a
total market value of $55.08 million and a yield to maturity of 7.3
percent. The company also has 4.58 million shares of common stock
outstanding, each selling for $28. The company’s CEO considers the
current debt–equity ratio optimal....

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