Explanation:
To reduce the portfolio's beta, we need to reduce the exposure to the market by going short the equity index futures:
Number of contracts = (βₙₑw − βₒₗd) × portfolio value / futures value
Number of contracts = (0.7 − 1.2) × $150 million / (4,320 × 250)
Number of contracts = −70
(Book 3, Module 34.2, LO 34.f)
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Question 25
Consider a large-cap U.S. equity portfolio with a market value of $150 million and a beta of 1.2. The relevant equity index futures is trading at 4,320 and the multiplier is 250. Which of the following strategies would reduce the portfolio's beta down to 0.7?
A
Long 125 contracts.
B
Short 125 contracts.
C
Long 70 contracts.
D
Short 70 contracts.
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