Question 2 asks:
· Client B’s portfolio holds $40 million of U.S. large-cap value stocks with a portfolio beta of 1.06. This client wants to shift $22 million from value to growth stocks with a target beta of 1.21. Allison will implement this shift using S&P/Barra Growth and S&P/Barra Value futures contracts.
Price of December S&P/Barra Growth futures contract
$117,475
Price of December S&P/Barra Value futures contract
$120,875
Beta of S&P/Barra Growth futures contract
1.15
Beta of S&P/Barra Value futures contract
1.03
When implementing the shift from value to growth stocks for Client B, the number of S&P/Barra Value future contracts Allison shorts will be closest to:
I know how to get the answer for the question, however are we expected to know how to complete the client’s objective by converting to growth and getting the overall portfolio beta to 1.21 while still having $18mm allocated to value and $22mm allocated to growth?
If so, I’m not able to figure out how to do this mathematically.