Explanation:
The investor must short 173 S&P 500 futures contracts to reduce the beta of the portfolio from 0.96 to 0.
Formula:
Where:
$50,000,000$250Calculation:
$1,111 \times `250` = \`277`,750$The negative sign indicates a short position. Therefore, the investor must short 173 S&P 500 index contracts to reduce the beta of the portfolio to 0.
Q-642. An investor owns a portfolio of some of the S&P 500 stocks that worth $50 million. The systematic risk of the portfolio to the S&P 500 index is 0.96. The investor wants to remove the systematic risk from his portfolio completely, so he decides to reduce the portfolio's beta to zero. If the value of the S&P 500 index futures contracts is 1,111 and each index point costs $250, how many contracts should he use to reduce the systematic risk?
A
The investor must buy 173 index futures contracts
B
The investor must short 173 index futures contracts
C
The investor must buy 180 index futures contracts
D
The investor must short 180 index futures contracts
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