Baran

6、A portfolio manager has a $15 million mid-cap portfolio that has a beta of 1.3 relative to the S& 400. S& 500 futures are trading at 1,150 and have a multiplier of 250. The most significant risk this manager faces in attempting to hedge his position is:

A) correlation risk resulting from a rollover of positions between the S& 400 and S& 500.
 
B) volatility risk arising from unstable correlation predictions.
 
C) basis risk resulting from a cross-hedge.
 
D) improper profit forecasts of the underlying position. 
 

 

Baran

The correct answer is C

 

Because the manager is considering hedging his S& 400 exposure with S& 500 contracts, his primary concern should be basis risk between the two.

Baran

7、A portfolio manager is constructing a portfolio of stocks and corporate bonds. The portfolio manager has estimated that stocks and corporate bond returns have daily standard deviations of 1.8 percent and 1.1 percent, respectively, and estimates a correlation coefficient of returns of 0.43. If the portfolio manager plans to allocate 35 percent of the portfolio to corporate bonds and the rest to stocks, what is the daily portfolio VAR (2.5 percent) on a percentage basis?

A) 2.71%. 
 
B) 3.05%. 
 
C) 2.57%.
 
D) 2.27%. 
 

 

Baran

The correct answer is A

First, calculate the daily percentage VAR for stocks and corporate bonds:

Stocks: VAR(2.5%)_{Percentage Basis} = z_2.5% ′ σ = 1.96(0.018) = 0.0353 = 3.53%

Bonds: VAR(2.5%)_{Percentage Basis} = z_2.5% ′ σ = 1.96(0.011) = 0.0216 = 2.16%

Next calculate the portfolio VAR using weights of 35% for bonds and 65% for stocks:

[0.65²(0.0353²) + 0.35²(0.0216²) + 2(0.35)(0.65)(0.0353)(0.0216)(0.43)]^0.5 = 0.0271 = 2.71%

Baran

8、How will the value of a portfolio of non-callable corporate bonds hedged with Treasury futures change if the yield curve shifts up in a parallel manner by an anticipated amount? The value of the newly hedged portfolio:

A) may increase or decrease. 
 
B) increases. 
 
C) decreases. 
 
D) stays the same.  
 

 

 

Baran

The correct answer is D

 

The portfolio is hedged against parallel movements in the yield curve so its value will not change.

Baran

9、The purpose of computing a minimum variance hedge ratio is to minimize the variance of the:

A) hedging instrument.
 
B) combined hedged and hedging instrument portfolio.
 
C) instrument to be hedged.
 
D) correlation estimator. 
 

 

Baran

The correct answer is B

 

The purpose of computing a minimum variance hedge ratio is to minimize the variance of the combined portfolio.

Baran

10、The minimum variance hedge ratio is equal to the product of the correlation coefficient between the spot and futures price changes and the ratio of the:

A) standard deviation of the futures to the standard deviation of the spot.
 
B) standard deviation of the spot to the standard deviation of the futures.
 
C) variance of the spot to the variance of the futures.
 
D) variance of the futures to the variance of the spot. 
 

 

Baran

The correct answer is B

 

The minimum variance hedge ratio is defined as the product of the correlation coefficient times the ratio of the standard deviation of the spot price change and the standard deviation of the future price change.