In the SS 13 chapter dealing with changing the beta and durations of portfolios with futures contracts on the index, schweser says something like – “the beta of the futures contract will not equal one.” why is this? schweser gives some crap explanation like “well, we might want to adjust the portfolio toward small cap exposure, which will have a very different beta from the index beta of one.” any more detail here?
Iwould think the beta on the S&P futures would be close to one, but maybe it’s different for other indexes such as small cap.
it is close to one but not exactly one. so, outside of tilting the portfolio toward higher beta portions of the index such as small cap, why?
There are a number of factors which will throw off Beta, which is derived from the statistical correlation measure, such as no arbitrage ranges, etc.
One of my favorite lines in all the readings – footnote 29, p111, vol5: “A key element in this statement is that the futures beta is the beta of the underlying index multiplied by the present value interest factor using the risk-free rate. This is a complex and subtle point, however, that we simply state without going into the mathematical proof.” Being neither complex nor subtle, I am thankful they spared us the proof.
Futures Beta for an index will not necessarily match the beta of the index. The beta for the futures will be given so I wouldn’t worry so much about it. If it isn’t given you will be able to calculate by inputting the other variables.