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7 February, 18:06

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9

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  1. 7 February, 18:35
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    Answer: Short 48 contracts.

    Explanation: Portfolio beta is a systematic measure, that checks all the risk in a portfolio of investments. It is used in calculating the Treynors measure in a portfolio.

    The trade necessary to reduce beta;

    Take the change in beta

    1.2 - 0.9 = 0.3

    Using the beta formula; beta coefficient multiplied by the weight of the portfolio.

    0.3 * $36,000,000 = $10,800,000

    The future contract times the index can be traded on

    900 * $250 = $225,000

    Therefore the trade necessary to reduce beta will be

    $10,800,000 : $225,000 = 48

    This means that we have to short 48 contract if we want beta to reduce from 1.2 to 0.9
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