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##### Alex Andrew, who manages a $95 million large-capitalization U.S. equity

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**Question**

Alex Andrew, who manages a $95 million large-capitalization U.S. equity portfolio, currently forecasts that equity markets will decline soon. Andrew prefers to avoid the transaction costs of making sales but wants to hedge $15 million of the portfolio?s current value using S&P 500 futures. Because Andrew realizes that his portfolio will not track the S&P 500 index exactly, he performs a regression analysis on his actual portfolio returns versus the S&P futures returns over the past year. The regression analysis indicates a risk-minimizing beta of o.88 with an R2 of 0.92.;Futures Contract Data;S&P 500 futures price 1,000;S&P index 999;S&P 500 index multiplier 250;a. Calculate the number of futures contracts required to hedge $15 million of Andrew?s portfolio, using the data shown. State whether the hedge is long or short. Show all calculations.;Can you insert the correct formula into the template under Unit 5.;Attachment Preview;Copy of MBA6166 Unit 1-6 Problems template.xls;UNIT 1 PROBLEMS;CHAPTER 4: PROBLEM 1;Given Data;A.;$40,000;$80;60%;$100;$40;500;1.667;Sophie Shoes;Stock;Initial Margin Requirement;Stock rises to this amount;Stock declines to this amount;# of shares you could purchase with cash;Leverage Factor;25.00%;-50.00%;B.;41.67%;-83.33%;CHAPTER 4: PROBLEM 2;Given Data;50,000;40%;$35;$45;$25;30%;2.500;Lauren's margin account;Margin Requirement;Gentry Shoe Corporation stock;Stock rises to this amount;Stock declines to this amount;Maintenance Margin;Leverage Factor;A.;3,571;# of shares;Bi.;$160,714;$35,714;Step 1: Calculate total value of the stock;Step 2: Calculate total amount earned after subtracting the borrowed amount;Bii.;$89,286;$39,288;Step 1: Calculate total value of the stock;Step 2: Calculate total amount lossed after subtracting the borrowed amount;36%;9%;$10,000;5;10;20;Tax Brackert;Annual return on investments;Value for one time investment for 5, 10 & 20 years;Years;Years;Years;CHAPTER 2: PROBLEM 4;Given Data;A.;5 years;(Note: Use the correct built-in Excel formuila. Please highlight the answer cell: Fill in cells with the approprite data. Note that not all cells are required to contain data);9%;RATE (or I);5;NPER (or N);$0;PMT;($10,000.00);PV;$59,847;FV;10 years;(Note: Use the correct built-in Excel formuila. Please highlight the answer cell: Fill in cells with the approprite data. Note that not all cells are required to contain data);9%;RATE (or I);10;NPER (or N);0;PMT;($10,000.00);PV;$151,929;FV;20 years;(Note: Use the correct built-in Excel formuila. Please highlight the answer cell: Fill in cells with the approprite data. Note that not all cells are required to contain data);9%;RATE (or I);20;NPER (or N);0;PMT;($10,000.00);PV;$511,601;FV;B.;5.76%;1st Step: Find the After-Tax Yield. You will use it as the discount rate.;324 2nd Step: Do the same as above in A.;5 years;(Note: Use the correct built-in Excel formuila. Please highlight the answer cell: Fill in cells with the approprite data. Note that not all cells are required to contain data);5.76%;RATE (or I);5;NPER (or N);$0;PMT;($10,000);PV;$56,101;FV;10 years;(Note: Use the correct built-in Excel formuila. Please highlight the answer cell: Fill in cells with the approprite data. Note that not all cells are required to contain data);5.76%;RATE (or I);10;NPER (or N);0;PMT;($10,000.00);PV;$130,332;FV;20 years;(Note: Use the correct built-in Excel formuila. Please highlight the answer cell: Fill in cells with the approprite data. Note that not all cells are required to contain data);5.76%;RATE (or I);20;NPER (or N);0;PMT;($10,000.00);PV;$358,505;FV;CHAPTER 5: PROBLEM 1;Given Data;Stock;A;B;C;# of Shares;1,000,000;10,000,000;30,000,000;T;60;20;18;T+1;80;35;25;A.;98;140;-42.86%;Step 1: Sum the amount for period T;Step 2: Sum the amount for period T+1;Step 3: Find the % Change (Hint: Just subtract the end amount from the beginning amount and then divide by beginning amount. Be sure to use parenthesis correctly);B.;$800,000,000;$1,180,000,000;-47.50%;Step 1: Find the market value of the shares for period T;Step 2: Find the market value of the shares for period T+1;Step 3: Find the % Change (Hint: Just subtract the end amount from the beginning amount and then divide by beginning amount. Be sure to use parenthesis correctly);UNIT 2 PROBLEMS;CHAPTER 13: PROBLEM 8;(Note: Do not need to complete since it is an essay question);CHAPTER 14: PROBLEM 3;Given Data;1.75;7%;15%;10%;A.;21.00%;B.;Beta;Risk-Free Rate;Market Return;Market Return;12.25%;CHAPTER 14: PROBLEM 9;Given Data;$100,000;10%;$100,000;$0;$15,000;$125,000;3;$133,100;$100,000;Step 1: Calculate the Future Value of the common stock amount that you will have after 3 years. Use the correct built-in formula in Excel;Step 2: Find the Present Value of the amount you calculated in Step 1. Use the correct built-in formula in Excel;$106,311;Would you choose Stock or the Lease Obligation?;Common Stock;Appreciation of stock each year;Lease Obligation;Year 1 end cash flow for lease obligation;Year 2 end cash flow for lease obligation;Year 3 end cash flow for lease obligation (Note that the amount includes the year 3 lease receipts + the sale proceeds of $100,000);Years;Step 3: Calculate the Present Value of the lease obligations. You will use the built-in NPV formula in Excel. You will not use the year 0 cash outflow of $100,000 in the formula. Just use the cash flows for years 1 thru 3.;Stock;CHAPTER 20: PROBLEM 9 (A & C only);A.;Given Data;Call Bid and Ask Prices;$2.553;Put Bid and Ask Prices;$1.297;Stock Portfolio Value (in millions);$55;Step 1: Calculate the Long Put max payoff;Step 2: Input the long put premium. It is the same amount for each cell. Input it as a negative number since you are buying the put, not selling it.;Step 3: Calculate the Net Profit;Expiration Date Value;35;40;45;50;55;60;65;70;75;Long Put (or protective put) max payoff;$20;$15;$10;$5;$0;$0;$0;$0;$0;Initial Long Put Premium;($1.317);($1.317);($1.317);($1.317);($1.317);($1.317);($1.317);($1.317);($1.317);$2.573;$1.317;Net Profit;$18.68;$13.68;$8.68;$3.68;($1.32);($1.32);($1.32);($1.32);($1.32);C.;Step 1: Calculate the Short Call max payoff;Step 2: Input the shot call premium. It is the same amount for each cell. Input it as a positive number since you are selling the call, not buying it.;Step 3: Calculate the Net Profit;Expiration Date Value;35;40;45;50;55;60;65;70;75;Short Call (or covered call) max payoff;$0;$0;$0;$0;$0;$5;$10;$15;$20;Initial Long Put Premium;$2.553;$2.553;$2.553;$2.553;$2.553;$2.553;$2.553;$2.553;$2.553;Net Profit;$2.55;$2.55;$2.55;$2.55;$2.55;$7.55;$12.55;$17.55;$22.55;UNIT 3 PROBLEMS;CHAPTER 9: PROBLEM 1;Given Data;0.05;0.02;0.04;0.80;1.40;1.60;2.25;$22.50;$15.00;$0.75;12.20%;17.20%;Expected Return for J;Expected Return for L;3.33%;5.00%;Step 1: Calculate the dividend yield for J & L;Dividend Yield for J;Dividend Yield for L;8.87%;12.20%;Step 2: Calculate the expected capital gain for J & L;Expected Capital Gain for J;Expected Capital Gain for L;$24.50;$16.83;A.;The expected return on an asset with zero systematic risk;The risk premium related to the 1st common risk factor;The risk premium related to the 2nd common risk factor;The response of asset J to changes in the inflation factor;The response of asset J to changes in the GDP factor;The response of asset L to changes in the inflation factor;The response of asset L to changes in the GDP factor;Security J current price;Security L current price;Dividend;Step 3: Calculate the expected price for J & L;Expected Price for J;Expected Price for L;B.;(Note: use formula on page 241 in the text);(Note: use formula on page 241 in the text);CHAPTER 7: PROBLEM 2;Step 1: Calculate the market value of your stock portfolio;Step 2: Calcualte the weighted average of each stock to your portfolio;Step 3: Calculate the return of each stock and add it up to obtain the portfolio return;Given Data;Stock;Disney;Starbucks;Harley Davidson;Intel;Walgreens;TOTAL;Market Value;$15,000;$17,000;$32,000;$23,000;$7,000;$94,000;Weighted Average;16.0%;18.1%;34.0%;24.5%;7.4%;100.0%;Chelle Computer;37;9;-11;8;11;4;Security Return;0.14;-0.04;0.18;0.16;0.05;Portfolio Return;2.23%;-0.72%;6.13%;3.91%;0.37%;11.93%;General Index;15;13;14;-9;12;9;CHAPTER 8: PROBLEM 6;Given Data;Year;1;2;3;4;5;6;A.;13.05%;B.;15.56;9.06;Calculate the Correlation Coefficient using the correct built-in formula in Excel;Calculate the Standard Deviation For Chelle Computer using the correct built-in formula in Excel;Calculate the Standard Deviation For the General Index using the correct built-in formula in Excel;C.;15.33;82.00;0.187;Step 1: Calculate the Covariance using the correct built-in formula in Excel;Step 2: Calculate the Variance of the General Index using the correct built-in formula in Excel;Step 3: Calculate Beta: (Use the formula on page 230);CHAPTER 19: PROBLEM 3 (A & B only);Step 1: Input the cash flow from the annual coupon in dollar terms under the Cash Flow column;Step 2: Use the built-in PV formula in Excel to calculate the PV of cash flows for each year and then sum them up;Step 3: Take the PV of cash flows for each year and divide it by the total;Step 4: Multiply the data in the "Year" column by the "PV as a % of price" column for each year;Step 5: Sum up the amounts you obtain in the "Year times PV as a % of price" column to obtain Macaulay Duration;Given Data;Market Yield =;10%;Year;1;2;3;4;5;TOTALS;Cash Flow;PV of Cash Flows;PV as a % of price;Macaulay Duration =;Year times PV as a % of price;years;UNIT 4 PROBLEMS;CHAPTER 6: PROBLEM 1;Given Data;Stock;B;F;T;C;E;Rit;11.50%;10.00%;14.00%;12.00%;15.90%;Rmt;4.00%;8.50%;9.60%;15.30%;12.40%;Abnormal Rates of Return for each stock;CHAPTER 25: PROBLEM 1 (A & B only);Given Data;Risk-Free Rate =;Portfolio;P;Q;R;S;Market;0.07;Return;0.15;0.20;0.10;0.17;0.13;Beta;1.0;1.5;0.6;1.1;1.0;Standard Deviation;0.05;0.10;0.03;0.06;0.04;A.;B.;Sharpe Ratio;Treynor Measure;UNIT 5 PROBLEMS;CHAPTER 21: PROBLEM 9 (A only);Given Data;A.;$95,000,000;$15,000,000;0.88;0.92;1,000;999;250;Value of the portfolio;Amount of the portfolio wanting to hedge;Beta;R-Squared;S&P futures price;S&P 500 Index;S&P 500 Index Multiplier;Equals the # of contracts that you need to sell to hedge $15 million of the portfolio;UNIT 6 PROBLEMS;CHAPTER 16: PROBLEM 3 (A only);Given Data;Assets under mgt past 12 months;Security sales past 12 months;Expense Ratio;Pretax Return (3 year average);Tax-adjusted Return (3 year average);Fund W;Fund X;Fund Y;Fund Z;289.4;37.2;0.33%;9.98%;9.43%;653.7;569.3;0.71%;10.65%;8.87%;1,298.4;1,453.8;1.13%;10.12%;9.34%;5,567.3;437.1;0.21%;9.83%;9.54%;Bond;95%;75%;30%;10%;ER;8%;9%;10%;11%;A.;Portfolio Turnover Ratio for each fund =;CHAPTER 16: PROBLEM 6 (A only);Given Data;8;27;Portfolio;1;2;3;4;Ms. A risk tolerance factor;Mr. B risk toerance factor;Stock;5%;25%;70%;90%;Variance;5%;10%;16%;25%;Expected Utility for Ms. A;Expected Utility for Mr. B

Paper#34985 | Written in 18-Jul-2015

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