the question went roughly like “someone would like to commit $1000 in 3 months to invest in a portfolio that has 60% equity (beta = Bp) and 40% bonds (duration = Dp). there were matching equity futures with (beta = Bf, price=Fs, multi=k) and bond futures with (Duration = Df, price=Fb). the question is how much money should be commited to equity futures and how much to bond futures?” i thought it’s straightforward: $600 to equity futures and $400 to bond futures. but i was wrong. and i don’t understand the answer either. can someone help me out?
This was an interesting question… basically an investor did not have enough money to meet the min. investment reqmnt. of a fund but wanted same exposure as the fund in this case 60/40 E/B. Say he had $1000, so should the investor buy $600 E and $400 bonds. The answer was no, since the number of contracts purchased depends on the beta of the equity component and duration of the bond and hence the dollar value of the investment…hope it makes sense…