Compute most cost-effective way to accomplish managers goal

Reference no: EM13925937

As we discussed in the chapter, futures can be used to eliminate systematic risk in a stock portfolio, leaving it essentially a risk-free portfolio. A portfolio manager can achieve the same result, however, by selling the stocks and replacing them with T-bills. Consider the following stock portfolio. Suppose the portfolio manager wishes to convert this portfolio to a riskless portfolio for a period of one month. The price of a particular stock index futures with a $500 multiplier is 369.45. To sell each share would cost $20 per order plus $0.03 per share. Each company's shares would constitute a separate order. The futures contract would entail a cost of $27.50 per contract, round-trip. T-bill purchases cost $25 per trade for any number of T-bills. Determine the most cost-effective way to accomplish the manager's goal of converting the portfolio to a risk-free position for one month and then converting it back.

Reference no: EM13925937

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