There’s a question where you’re converting an equity portfolio to cash, but use the (Bt-Bp)/Bf * Vp/Pf formula instead of the Vp(1+rf)/Pf formula from Los 41-c (which also happens to be the los the answer references? The question didn’t provide a Rf, and if you used the latter formula, ignoing the rf part, you would’ve gotten one of the wrong answer choices. Any ideas?
I think you’re referring to #46. I had the same initial thoughts until I realized the Rf rate wasn’t given.
So if they don’t give you Rf do you just use the Beta formula and set the “Target Beta” equal to zero? So that it’s: Nf = -(Bp/Bf)(Vp/Pf)?
yes, 46. But are they simply interchangable - I don’t think they’d yield the same answer? And it seems a bit strange that they’d reference an los in the answer explanation which is linked to the non Beta formula, and than use the beta formula for the correct answer choice?
Good question. I got this right but then couldn’t think of a good reason why to use one or the other, as you say. I found this on page 363 of the CFAI text - SS13-15: (This is in reference to the Vp(1+rf)/Pf formula) “In Section 3.2 we gave a different formula to reduce the portfolio beta to zero. These formulas do not appear to the same. Would they give the same value of Nf? In the example here we sell the precise number of futures to completely hedge the stock portfolio. The stock portfolio, however, has to be identical to the index. It cannot have a different beta. The other formula, which reduces the beta to zero, is more general and can be used to eliminate the systematic risk on any portfolio.” It goes on to say if you apply the beta formula to a portfolio that is identical to the index that the futures is based, the formulas yield the same result. So I think that since the question says Client D has a portfolio of “large cap growth stocks”, you use the Beta formula - even if Rf had been given. --Good example of the information CFAI books provide that Schweser does not.
> It goes on to say if you apply the beta formula to > a portfolio that is identical to the index that > the futures is based, the formulas yield the same > result. So I think that since the question says > Client D has a portfolio of “large cap growth > stocks”, you use the Beta formula - even if Rf had > been given. > > --Good example of the information CFAI books > provide that Schweser does not. Wow, good find. Thanks for pointing that out!
Thanks. It seems the page number not changed.