Determine most cost effective way to accomplish manager goal

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Reference no: EM131325750

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.

Stock	Number of Shares	Price	Beta
Northrop Grumman	14,870	18.13	1.10
Northrop Grumman	14,870	18.13	1.10
H. I. Heinz	8,755	36.13	1.05
Washington Post	1,245	264.00	1.05
Disney	8,750	134.50	1.25
Wang Labs	33,995	4.25	1.20
Wisconsin Energy	12,480	29.00	0.65
General Motors	14,750	48.75	0.95
Union Pacific	12,900	71.50	1.20
Royal Dutch Shell	7,500	78.75	0.75
Illinois Power	3,550	15.50	0.60

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: EM131325750

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