8006 Exam Dumps | An investor has a portfolio with a value of $1,000,000 and a beta of 2.5. He believes the portfolio carries

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
Question 72

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Question 72/101

An investor has a portfolio with a value of $1,000,000 and a beta of 2.5. He believes the portfolio carries more market risk than he desires and wishes to reduce the beta to 1. How many futures contracts should be buy or sell to reduce the beta if the futures contracts have a beta of 1.2 and the notional value of each contract is
$240,000?

A. Buy 1 contracts

B. Sell 5 contracts

C. Buy 4 contracts

D. Sell 9 contracts

Correct Answer: B

Explanation
The investor's needs to sell futures contracts, as his current position is long. He needs to sell ($1,000,000 x (2.5-1)) / ($240,000 x 1.2) = 5.2 contracts, or rounded to 5 contracts.
It is important to note here that the investor wishes to retain a beta of 1, and does not want to get rid of all market exposure.

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