what is the best way a portfolio manager can mitigate upcoming risks knowing that there is...

what is the best way a portfolio manager can mitigate upcoming risks knowing that there is a rapid change in the market to come in the next month?

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Expert Solution

The best way a portfolio manager can mitigate upcoming risk knowing that there is a rapid change in the market to come in the next month is to do hedging. Instead of shorting equivalent stock in cash or delivery of their portfolio, it is better and good decision to hedge the portfolio. As it is given that there is rapid change in the market means that market will going to correct for more than 10% and the cost involve in hedging for 1 year will be almost for 6% to 10% depending upon the type of assets to be hedge. Also, it should be first analyse where this rapid change in the market to come in next month what will be reason behind the correction whether micro factor or macro factor for the correction. If the reason behind is from macro factors then portfolio manager should sell some portion of their portfolio which is profitable and expect high impact by the macro /micro factors. And will hedge for remaining fund. THe macro factor will take long time to improve than micro factors. If the reason behind is from micro fatcor then partial hedging is sufficient for remain migitation of upcoming portfolio.

jeff jeffy answered 1 year ago

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