Explanation:
Neither of the strategies are accurate. The beta of a portfolio is a measure of its systematic risk, or the risk that cannot be eliminated through diversification. It is a measure of the portfolio's sensitivity to market movements. When it comes to adjusting the beta of a portfolio using futures contracts, the strategies are reversed. To increase the beta of a portfolio, a long position in a specific number of additional futures contracts should be taken. This is because taking a long position in futures contracts increases the exposure of the portfolio to the market, thereby increasing its systematic risk or beta. Conversely, to reduce the beta of a portfolio, a short position in a specific number of additional futures contracts should be taken. This is because taking a short position in futures contracts reduces the exposure of the portfolio to the market, thereby reducing its systematic risk or beta.
Q.641 The index futures contracts are not only used to hedge the risk of the portfolio but sometimes the futures contracts are also used to change the current systematic risk or the beta of the portfolio to a desirable level. Here are two potential strategies to reduce and increase the beta of a portfolio:
I. If the beta of the portfolio is to increase from its current beta, a short position in a specific number of additional futures contracts must be taken
II. If the beta of the portfolio is to reduce from its current beta, a long position in a specific number of additional futures contracts must be taken
Which of the potential strategies is/are accurate?
A
A. The strategy to increase the beta is accurate, but the strategy to reduce the beta is inaccurate.
B
B. The strategy to reduce the beta is accurate, but the strategy to increase the beta is inaccurate.
C
C. Both strategies to increase and reduce the beta of the portfolio are accurate.
D
D. Neither strategies are accurate.
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