2. An equity portfolio manager rarely if fully invested in thefund but will have some funds in cash. Unfortunate, this createswhat is called a cash drag on the portfolio due to the low returnon cash funds. On way to deal with this is called neutralizingcash. It involves using stock index futures to synthetically raisethe equity position of the portfolio to overcome the cash drag. Theportfolio currently has an asset value of $500 million. 95% of itis invested in a stock portfolio that has an average beta=1.0. Thereaming 5% is in a cash fun. In a six month period the broad market(s&p) rise by 11.50% while the cash fund rises by 2.5%.
a. Based on the portfolio weight, compute the portfolio weightaverage over the six month period. Compare this return to the boardmarket return. How much did the portfoliounderperform the market?
b. One way to add return is to synthetically add stock exposurewith stock index futures. We want to have a synthetically portfoliothat has 100% stock exposure so we need to add 5% of the portfoliovalue in stock index future? The current index future price is 1200and the contract size is $250 times the index. This is differentthan hedge in that we want the additional stock exposure so wewould take a long position inn future. The chosen contract willmature three months from today?
c. In three months the following changes have taken place: TheS&P 5 has gone from 1120 to 1220 and the contract matures soconvergence taken place. Based on portfolio these parameters,analyze the performance of the futures position. How much portfoliovalue did the extra equity exposure add?
2. An equity portfolio manager rarely if fully invested in thefund but will have some funds in cash. Unfortunate, this createswhat is called a cash drag on the portfolio due to the low returnon cash funds. On way to deal with this is called neutralizingcash. It involves using stock index futures to synthetically raisethe equity position of the portfolio to overcome the cash drag. Theportfolio currently has an asset value of $500 million. 95% of itis invested in a stock portfolio that has an average beta=1.0. Thereaming 5% is in a cash fun. In a six month period the broad market(s&p) rise by 11.50% while the cash fund rises by 2.5%.
a. Based on the portfolio weight, compute the portfolio weightaverage over the six month period. Compare this return to the boardmarket return. How much did the portfoliounderperform the market?
b. One way to add return is to synthetically add stock exposurewith stock index futures. We want to have a synthetically portfoliothat has 100% stock exposure so we need to add 5% of the portfoliovalue in stock index future? The current index future price is 1200and the contract size is $250 times the index. This is differentthan hedge in that we want the additional stock exposure so wewould take a long position inn future. The chosen contract willmature three months from today?
c. In three months the following changes have taken place: TheS&P 5 has gone from 1120 to 1220 and the contract matures soconvergence taken place. Based on portfolio these parameters,analyze the performance of the futures position. How much portfoliovalue did the extra equity exposure add?
