Effective beta calculation

CFA Level III
#1

Question says: Size of portfolio = 168m Allocation 70% stocks, 30% bonds S&P futures contracts priced at 1,526. No. of S&P contracts bought = 187. Multiplier = 250

6 months later, stock market has risen 2.2%, stocks in portfolio have generated a total return of 2,199,120 and S&P contracts are now priced at 1,547 Using Schweser method to calculate effective beta: Gain in S&P futures = 187 (1,547 – 1,526) = 981,750 Gain on portfolio = 2,199,120 Total portfolio value 6 months later = 981,750 + 2,199,120 + 168m = 171,880,870 Total portfolio return = 171,880,870 / 168,000,000 = 0.23 Effective beta = total portfolio return / market return = 0.23 / 0.22 = 1.05

The correct answer is = gain on portfolio + gain on futures) / equity value = (2,199,120 + 981,750) / 117,600,000 = 0.027

Effective beta = 0.027 / 0.022 = 1.23 What am I doing wrong in calculation where I get 1.05?

#2

Your beginning equity value is 117,600,000

#3

To eloborate further, just ifnore the 30% allocated to bonds and do all the calculations just for the 705 allocated to equity.

Beta is for equity :wink:

#4

Why is effective beta only looking at the equity component? The questions for effective beta use the wording hedged portfolio return = hedged portfolio ending value / hedged portfolio beginning value. So not sure why portfolio = equity?

#5

think about it before you ask that question. do you have beta for a fixed income part of portfolio?

alternatively - are you going to use S&P contracts to adjust the S&P part of your portfolio?

Either way - you are thinking too much right now.

#6

think about it before you ask that question. do you have beta for a fixed income part of portfolio?

alternatively - are you going to use S&P contracts to adjust the S&P part of your portfolio?

Either way - you are thinking too much right now.

#7

Got it, beta is only for equity. But why do they use the word hedged portfolio , doesnt hedged equity make more sense? This is also the case with leverage, where they say the return on equity invested (i.e. the portfolio) = portfolio gain / equity