Question

In: Finance

An equity portfolio is worth $100 million with the benchmark of the Dow jones Industrial Average....

An equity portfolio is worth $100 million with the benchmark of the Dow jones Industrial Average. The Dow is currently at 10,000 and the corresponding portfolio beta is 1.2. The multiplier for the Dow is 10.

1) Please compute the number of contracts needed to double the portfolio beta.

2) Please compute the number of contracts needed to cut the beta in half.

Solutions

Expert Solution

We have following formula to calculate the number of contracts required

Number of contracts = {Total value of indexed equity portfolio / (Index value * multiplier for index)} *beta

Where,

Total value of indexed equity portfolio = $100 million

Index value (Dow jones Industrial Average) = 10,000

Multiplier for index = 10

Portfolio beta = 1.2

Therefore,

Number of contracts = {$100,000,000 / (10,000 * $10)}*1.2

= {$100,000,000 / $100,000}*1.2

= 1,200

1) Please compute the number of contracts needed to double the portfolio beta.

Number of contracts needed to double the portfolio beta = {Total value of indexed equity portfolio / (Index value * multiplier for index)} *beta

Where,

Total value of indexed equity portfolio = $100 million

Index value (Dow jones Industrial Average) = 10,000

Multiplier for index = 10

Portfolio beta = 1.2 *2 = 2.4

Therefore,

Number of contracts = {$100,000,000 / (10,000 * $10)}*2.4

= {$100,000,000 / $100,000}*2.4

= 2,400

2) Please compute the number of contracts needed to cut the beta in half.

Number of contracts needed to cut the beta in half = {Total value of indexed equity portfolio / (Index value * multiplier for index)} *beta

Where,

Total value of indexed equity portfolio = $100 million

Index value (Dow jones Industrial Average) = 10,000

Multiplier for index = 10

Portfolio beta = 1.2/2 = 0.6

Therefore,

Number of contracts = {$100,000,000 / (10,000 * $10)}*2.4

= {$100,000,000 / $100,000}*0.6

= 600

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Dow Jones Industrial
Listed below in order by row are the annual high values of the Dow Jones Industrial Average for each year beginning with 1980. What is the best predicted value for the year 2006? Given that the actual high value in 2006 was 12,464, how good was the predicted value? What does the pattern suggest about the stock market for investment purposes? Construct a scatterplot and identify the mathematical model that best fits the given data. Assume that the model is...
“The Dow 10 Strategy” maintains a portfolio of the 10 highest yielding Dow Jones industrial stocks....
“The Dow 10 Strategy” maintains a portfolio of the 10 highest yielding Dow Jones industrial stocks. Consider the data as per table, for the 25 years. Compute the average annual returns for the Dow Jones Portfolio and the Dow 10 Strategy portfolio. Comment about the reward. Compute the sample standard deviation for each portfolio. Comment about risk. Compute the geometric mean Xg of 1+Rj for each portfolio. Compute (Xg)-1. What does this last number represent?   is the equation relating least...
“The Dow Jones Industrial Average (DJIA) is simply the average value of 30 large industrial stocks....
“The Dow Jones Industrial Average (DJIA) is simply the average value of 30 large industrial stocks. Big companies like General Motors, Goodyear, IBM, and Exxon are the kind of companies that make up this index” (Lott, 2008)read the What is the Dow Jones Industrial Average? and the Dow Jones Industrial Average. Using the structure of the Dow and after reviewing the graphs for the first and second quarters of the year, describe the activity that has occurred this year.
Say the level of the market as measured by the Dow Jones Industrial Average is currently...
Say the level of the market as measured by the Dow Jones Industrial Average is currently at 12,000. A forecaster has made a prediction of 13,300 for the level of the market in one year, along with a 95% confidence interval whose lower bound is 12,500 and whose upper bound is 14,500. You know from experience that this particular forecaster tends to be both excessively optimistic and miscalibrated. Describe how you might debias this individual. Give a numerical example (making...
Say the level of the market as measured by the Dow Jones Industrial Average is currently...
Say the level of the market as measured by the Dow Jones Industrial Average is currently at 12,000. A forecaster has made a prediction of 13,300 for the level of the market in one year, along with a 95% confidence interval whose lower bound is 12,500 and whose upper bound is 14,500. You know from experience that this particular forecaster tends to be both excessively optimistic and miscalibrated. Describe how you might debias this individual. Give a numerical example (making...
One theory concerning the Dow Jones Industrial Average is that it is likely to increase during...
One theory concerning the Dow Jones Industrial Average is that it is likely to increase during U.S. presidential election years. From 1964 through 2000, the Dow Jones Industrial Average has increased in eight of the ten US. presidential election years. Assuming that this indicator is a random event with no predictive value, you would expect that the indicator would be correct 50% of the time. What is the probability of the Dow Jones Industrial Average increasing in eight or more...
"The Dow Jones Industrial Average is the best indicator of how well the U.S. economy is...
"The Dow Jones Industrial Average is the best indicator of how well the U.S. economy is doing" Do you agree or disagree with this statement? Explain why or why not.
The Dow Jones Industrial Average has had a mean gain of 432 pear year with a...
The Dow Jones Industrial Average has had a mean gain of 432 pear year with a standard deviation of 722. A random sample of 40 years is selected. What is the probability that the mean gain for the sample was between 250 and 500? 0.669 0.137 0.331 0.863
The S&P 500 and the Dow Jones Industrial Average indices are proxies for the broader US...
The S&P 500 and the Dow Jones Industrial Average indices are proxies for the broader US stock market. You notice one day that the S&P 500 closed UP by 0.20%, while the DJIA closed DOWN by 0.20%.   Explain how it is possible for one proxy (S&P 500) to have a positive return while the other (DJIA) has a negative return on any given day. Include in your explanation some names that could have caused this discrepancy. Which return (S&P 500...
The S&P 500 and the Dow Jones Industrial Average indices are proxies for the broader US...
The S&P 500 and the Dow Jones Industrial Average indices are proxies for the broader US stock market. You notice one day that the S&P 500 closed UP by 0.20%, while the DJIA closed DOWN by 0.20%. Explain how it is possible for one proxy (S&P 500) to have a positive return while the other (DJIA) has a negative return on any given day. Include in your explanation some names that could have caused this discrepancy. Which return (S&P 500...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT