1. It is April 15. A manager wants to protect his portfolio against a bear market until August 15, using a short hedge. The portfolio to be hedged is a well-diversified tock portfolio with a value of...

1. It is April 15. A manager wants to protect his portfolio against a bear market until August 15, using a short hedge. The portfolio to be hedged is a well-diversified tock portfolio with a value of $10 million and a beta of 1.43. On April 15, the S&P 500 stock index futures contract, delivery September, is quoted at 1,277. On August 15, the hedge is lifted. The September S&P 500 stock index futures price has fallen by 5.5 percent.

a. The manager used a hedge ratio equal to 1. Compute the payoff on August 15.

b. Compute the payoff on August 15 if the short hedge took into account beta.