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Amy Allison Case ScenarioAmy Allison is a fund manager at Downing Securities. The third quarter ends today and she is preparing for her quarterly review with her five largest U.S.-based clients. To complete her analysis she has obtained the market data in Exhibit 1.Exhibit 1Market DataAs of September 30 Allison’s assistant has prepared the following summaries of each client’s current situation, including any recent inquiries or requests from the clients.l Client A has a $20 million technology equity portfolio. At the beginning of the last quarter, Allison forecasted a weak equity market and recommended adjusting the risk of the portfolio by lowering the portfolio’s beta from 1.20 to 1.05. To lower the beta, Allison sold 25 December NASDAQ 100 futures contracts at $124,450. During the quarter, the market decreased by 3.5 percent, the value of the equity portfolio decreased by 5.1 percent, and the NASDAQ futures contract price fell from $124,450 to $119,347. Client A has questioned the effectiveness of the futures transaction used to adjust the portfolio beta.l Client B’s portfolio holds $40 million of US 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. l Client C anticipates receiving $75 million in December. This client is optimistic about the near-term performance of the equity and debt markets and does not want to wait until the money is received to invest it. The client wants Allison to establish a position that allocates 60 percent of the money to a well-diversified equity portfolio with a target beta of 1.00 and 40 percent of the money to a long-term debt portfolio with a target modified duration of 5.75. Allison plans to use the December U.S. Treasury-bond futures to establish the debt position. l Client D’s portfolio contains $60 million in U.S. large cap growth stocks with a beta of 0.95 and $25 million in US Treasury bonds with a modified duration of 5.20. The client believes both stocks and bonds will have negative returns over the next 3-month period. Allison recommends converting the equity and bond exposures to cash by using futures contracts. Client E has $10 million in cash and is optimistic about the near-term performance of the large-cap stocks in the U.S. equity market. The client anticipates positive performance for approximately 3 months at which time inflation fears will begin to be priced into the market and the large-cap stocks will underperform cash. Client E asks Allison to implement a strategy that will create profit from this view if it proves to be correct and can be exited quickly if it proves to be incorrect. |
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