标题: Discrepancy (I think?) between two equitizing questions [打印本页] 作者: jcole21 时间: 2011-7-11 19:02 标题: Discrepancy (I think?) between two equitizing questions
In the first question (no need to read the whole question), the answer is A, which means that choice C is correct (i.e. "In a long-short, market neutral strategy the benchmark should be the risk-free rate" is a true statement). Given that, I would expect the answer to the second question to be C, since you have a market neutral strategy + a futures position. Can someone explain why the risk free rate is ignored in the second question? Thanks.
Question 1
Which of the following concerning investment strategies is least accurate?
A) If a manager does not have an opinion about an index stock in stock-based enhanced indexing strategy, they will not hold the stock.
B) Stock-based enhanced indexing strategy can produce higher information ratios because investors can apply their knowledge to a large number of securities.
C) In a long-short, market neutral strategy the benchmark should be the risk-free rate.
The correct answer was A.
If a manager does not have an opinion about an index stock in a stock-based enhanced indexing strategy, they will hold the stock at the same level as the benchmark. Stock-based enhanced indexing strategies can produce higher information ratios because the investor can systematically apply his knowledge to a large number of securities, each of which would require independent decisions. Because a long-short, market neutral strategy has no systematic risk, its benchmark should be the risk-free rate (the return on T-bills).
Question 2
Which of the following is the correct benchmark for a market neutral long-short strategy equitized with S&P 500 futures contracts?
A) The S&P 500 index.
B) The risk-free rate.
C) The S&P 500 index plus the risk-free rate.
The correct answer was A.
If a long-short, market neutral strategy is equitized, the benchmark is the underlying index of the futures contract (in this case the S&P 500).作者: lcai 时间: 2011-7-11 19:02
You have equitized the cash( generated by the short side ) by investing in S&P 500 index futures. So your return will come from S&P 500 index not from cash.
Remember the futures price has a risk free rate "built into it" plus tracks the cash index. So the index already incorporates the risk free rate when traded as a futures contract. That is the inherent leverage available thru the Futures contract.
Plus it has the cash index equity rate of return built into it.
If you include the S&P index and the risk - free rate both , you'd be double counting the risk free rate.
In the first q, the risk free rate is all you get , since you did not equitize cash.作者: ll11 时间: 2011-7-11 19:02
yes , that's right. You gain the S&P index return and give up the risk free rate of return by equitizing cash作者: Chuckrox 时间: 2011-7-11 19:02
You do not need cash to go long the S&P Futures contrct , or at least very little of it. You just need margin which is frequently ignored in the calculations. So there is not much borrowing going on if you use Futures . While there is full borrowing if you invest in stocks in the index.
The futures price however builds in the risk free rate as well . So it is higher than the spot price , i.e. F=S*(1+r)^t holds under no-arb, no storage, no convenience condition.
At convergence i.e. expiry , the Futures price=Spot price.
So the implied rate of return on the futures contract is lower than the direct return on the stock index , given all the above conditions.
