The text states the following: “taking the long position in index futures contracts will increase the beta and leverage up the position”. Shorting the futures reduces the beta.
Can someone expand on this conceptually. How does a long position in a futures contract increase the beta position and what does does it mean that the position has been leveraged up?
Thanks for any help!
futures tracks a diversified stock index . so it is an ideal representation of systematic risk factor . It should have very low unsystematic risk component . systematic risk sensitivity is nothing bu beta .
So if you want to increase systematic risk component , go long the futures contract . The bigger the proportion of futures in the portfolio , the more beta ( systematic risk ) it will have
futures is a form of leveraged investment because there is no upfront investment of capital ( strictly speaking margin must be posted but that is small in relation to notional ) . Yet at the end of the trade yu realize a profit or loss in proportion to your notional amount.
In Schweser pg 146 bottom of the page, it shows the Same answer as was found in the blue box but using the basic formula. My question: where did they get the (1.031^1/2) ? And how does that times $120 mm equal the portfolio value?
Nevermind. Checked Schweser and its been posted as errata - should be 1.03^1/2.