In this question, Lewis wants to transform his portfolio into synthetic cash for the next 3 mo. I get what the answer is all about. However, my questions is that why don’t we need to adjust the number by different betas of the portfolio and the future. You see Lewis’ mid cap index has a beta of 1.20 and the beta of the mid cap future is 1.29. Therefore my desired calculation would be: 1.2*75mil/(1.29*2350*100) and the result is 297. Since no such choice exists, I choose the closest one, which happens to be the correct one. Bottom line: I think ignoring the different betas does not make sense and it directly contradicts the answer given to question 43? Do we have to swallow this answer as is or I missed something in the analysis above? Thanks for your advice.
Are you referring to the “Mock Exam” or the “Sample Exam”. If the latter, there is no question #47 because there are only 30 questions. ?
Then it should be the Mock Exam. I got confused. Cannot change the original post though. Any thoughts?
Shoot. I haven’t taken the mock yet.
I figured it out.
I posted the same question about a week ago… Didn’t really get an answer–the thread was sidetracked by some barely literate d-bag. http://www.analystforum.com/phorums/read.php?13,950143,950143#msg-950143
This is very confusing. When we want to modify the portfolio beta to some number, we take beta into consideration. But not when we want to create synthetic cash (beta0).
CFAMonster Wrote: ------------------------------------------------------- > In this question, Lewis wants to transform his > portfolio into synthetic cash for the next 3 mo. I > get what the answer is all about. However, my > questions is that why don’t we need to adjust the > number by different betas of the portfolio and the > future. > > You see Lewis’ mid cap index has a beta of 1.20 > and the beta of the mid cap future is 1.29. > Therefore my desired calculation would be: > > 1.2*75mil/(1.29*2350*100) and the result is 297. > Since no such choice exists, I choose the closest > one, which happens to be the correct one. > > Bottom line: I think ignoring the different betas > does not make sense and it directly contradicts > the answer given to question 43? > > Do we have to swallow this answer as is or I > missed something in the analysis above? Thanks for > your advice. When you are converting into synthethic cash, it means taking out any beta and not carrying any risk; so why would you covert it back to the index beta? You want to effectively take out all beta and carry cash return, so you are using 0.
If I use 0 how I can take out all the beta? I believe the answer considers beta to be 1 for both index and future.