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Market Value and Hedge Positions Given Expected Market Drop

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You are given the following information about a portfolio you are to manage. For the long-term you are bullish, but you think the market may fall over the next month.

Portfolio Value: $1 million
Portfolio's Beta: 0.86
Current S&P500 Value 990
Anticipated S&P500 915

a. If the anticipated market value materializes, what will be your expected loss on the portfolio?
b. What is the dollar value of your expected loss?
c. For a 75-point drop in the S&P500, by how much does the index change?
d. How many contracts should you buy or sell to hedge your position? (fractions permitted)

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Solution Summary

The expert examines market value and hedge positions for given expected market drop.

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a. change = (915-990)/990 = -7.57%
loss in the portfolio = 0.86*7.57% = 6.62%

b. ...

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