) WITH RESPECT TO CLIENT A, ALLISON'S MOST APPROPRIATE CONCLUSION IS...
1.) With respect to Client A, Allison's most appropriate conclusion is the futures transaction
used to adjust the beta of the portfolio was:
A.
ineffective because the effective beta on the portfolio was 1.27.
B.
effective.
C.
ineffective because the effective beta on the portfolio was 1.64.
Answer = A
The effective beta is the (hedged) return on the portfolio divided by the return on the
market. The return on the market is –3.5%. The return on the portfolio is –5.1% plus the
return on the futures position. The return on the (short) futures position relative to the
unhedged portfolio is –25 × (119,347 – 124,450)/20,000,000 = +0.0064. Effective beta =
(–0.051 + 0.0064)/–0.035 = 1.27.
“Risk Management Applications of Forward and Futures Strategies,” by Don M. Chance