Altering Beta of a portfolio

CFA Level III Derivatives
#1

FinQuiz Question ID: 8702 (Reading 29)

Qustion

If the benchmark index has a beta of 1, and the reference index increases in value by 2.5%, the profit/loss from the equity position and the futures position will be closest t

Answer:

The index increased by 2.5%, so the value of the equity position will increase by 1.75% -'1’and the value of the futures price will increase by 2.125%. - ‘2’

Profit from the equity position: 50,000,000 (1.0175) – 50,000,000 = $875,000.

Profit from the futures contract: 50 ($350,000) (1.02125) – 50 ($350,000) = $371,87

‘1’ 1.75 = 2.5 * 0.7 (portfolio beta)

‘2’ 2.125 = 2.5 * 0.85 (futures beta)

I am trying to understand how to change the calculations if the benchmark index has a beta of 1.25 (say)

Kindly help

#2

I wish that I knew what they were doing in those calculations.

#3

Yea TT - kinda need more info from the question. Sounds like one of those effective beta problems

#4

That inability to understand, combined with the constant typos is why I deemphasized Finquiz questions in my prep schedule.

#5

For whatever it’s worth, I wrote an article on adjusting the beta or value of an equity portfolio that may be of help (in place of trying to figure out what FinQuiz is doing): http://financialexamhelp123.com/adjusting-the-valuebeta-of-an-equity-portfolio-using-equity-futures/.