3. You are the manager of a stock portfolio. On Oct 1, your holdings consist...
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3. You are the manager of a stock portfolio. On Oct 1, your holdings consist of eight stocks listed below, which you intend to sell on Dec 31. You are concerned about a market decline over the next three months. The number of shares, their prices, and the betas are shown, as well as the prices on Dec 31 Oct 1 Price Stock Donnelle Goodrich Raytheorn Mayta Kroger Comdisco Cessna Foxboro Number of Shares Beta Dec 31 Price 10,000 6,200 15,800 8,900 11,000 14,500 9,900 4,500 1.00 1.05 1.15 0.90 0.85 1.45 1.20 0.95 19 5/8 31 3/8 49 3/8 55 3/8 42 1/8 19 3/8 29 3/4 24 3/4 27 3/8 32 7/8 53 5/8 77 7/8 47 7/8 28 5/8 30 1/8 26 On Oct 1, you decide to execute a hedge using a stock index futures contract, which has a $500 multiplier The Mar contract price is 376.20. On Dec 31, the Mar contract price is 424.90. Determine the outcome of the hedge. (Hint: the portfolio beta is simply the weighted average of the betas of the individual assets, with the weights being identical to those that define the portfolio)
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