Portfolio Management Techniques Flashcards

A $50 million portfolio has a beta of 1.2; the target beta is 0.8. Index futures have a beta of 1.0 and contract value of $500,000. What should the manager do?

Answer: Sell 40 contracts

N = (0.8 − 1.2) × $50M / $500,000 = −40, so sell 40 contracts.

Which strategy establishes a minimum portfolio value while keeping full upside participation, at the cost of an upfront premium?

Answer: Protective put

A long put sets a floor and leaves upside uncapped, but requires paying a premium.

Writing out-of-the-money calls on an existing equity holding primarily:

Answer: Generates premium income while capping upside

A covered call earns premium but forfeits gains above the strike.

A fund receives a large cash inflow and buys index futures until the cash can be invested in securities, to avoid cash drag. This is called:

Answer: Cash equitization

Cash equitization uses derivatives to give idle cash market exposure.

Implementation shortfall measures:

Answer: The difference between the paper portfolio return at the decision price and the actual portfolio return

It captures all explicit and implicit costs, including delay and opportunity cost, from decision to execution.

A US investor holding euro-denominated bonds wants to eliminate currency risk. The most direct technique is to:

Answer: Sell euros forward

Selling euros forward locks in the dollar value of the euro exposure.

A risk parity portfolio allocates capital so that:

Answer: Each asset class contributes equally to total portfolio risk

Risk parity equalizes risk contributions, often levering low-volatility assets like bonds.