I saw this on a non cfa context, but appears to be related to the cfa topic.
Im curious if anyone could help me understand the solution.
Thanks
The value of a portfolio is 33600. The s&p 100 is 212.50 The portfolio manager buys 2 s&p 100 sept 210 puts. What is the beta of the portfolio?
I dont want to give the answer supplied, because Im not sure its correct.
Thanks
was that all the information given?
That was it.
I presume it has something to do with the value of the puts he is buying vs the portfolio. Puts = 200*210 = $42,000 / $33,600 = 1.25.
Making the assumption that he is looking to completely hedge the portfolio downside and that the S&P100 is an approporiate measure of the market risk that the portfolio has assumed.
Your answer is the one they got but im curious how you got it.
I was trying to use the beta adjustment with futures formula, which uses addition/subtraction.
This answer is using division.
(1) Assume that the S&P 100 is a market proxy - market has a beta of 1 --> Cov(m,m)/Var(m) = 1
(2) Given that the market has a beta of 1 - the face value of the puts he has invested in is a multiple of the portfolio…the additional leverage in the puts therefore matches the beta of his portfolio - if we believe the assumption that he is completely hedging.
Agree with (1)
(2) (agree with )Given that the market has a beta of 1 - the face value of the puts he has invested in is a multiple of the portfolio…
the additional leverage in the puts therefore matches the beta of his portfolio - if we believe the assumption that he is completely hedging. (thinking of the puts have a greater hedging than that of the portfolio.
Am I wrong here? this is what im thinking…
Beta(target)Value(target)= Beta(portfolio)Value(portfolio) +beta(futures)*number*Multiplier*Price(futures)
Which lead me to.
Beta(target)33600= 1(33600)- 1*2*100*210.00
Resulting in a beta of apx. -.25( if the market went down) or 1 if it went up (as puts would be worthless then.)
If you could share where im making my error, its appreciated.
It’s not puts. It’s futures. Use your futures hedging formula and solve for initial beta of the portfolio assuming target B is 0 and B of the futures is 1
got it… thanks.