Question

A manager is holding a $1.25 million stock portfolio with a beta
of 1.17. She would like to hedge the risk of the portfolio using
the S&P 500 stock index futures contract. How many dollars’
worth of the index should she sell in the futures market to
minimize the volatility of her position? **(Enter your answer
in dollar not in millions.)**

**Dollars worth of index to be sold?**

**Show your work with formulas in Excel**

Answer #1

=> Beta measures the volatility of stock comparatively to the market

=> Here we have portfolio beta of 1.17, that means the portfolio is 17% more volatile than the S&P 500 index

* This means that if S&P 500 increase by 1% then the portfolio increase by 1.17% and if S&P 500 decreases by 1% then the portfolio decreases by 1.17%

=> Multiply the portfolio beta with the amount the manager is holding in his portfolio

* 1,250,000*1.17 = 1,462,500

=> Therefore **the manager has to sell $ 1,462,500
worth of S&P stock index futures to hedge his
position**

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