Hedging Strategies and Risks

What is a potential downside of selling stocks during a market downswing?

• It guarantees higher returns.

• It increases the value of the portfolio.

• It eliminates all risks.

• It can lead to transaction and opportunity costs.

How does hedging aim to protect a portfolio during a market downturn?

• By guaranteeing profits.

• By eliminating all market risks.

• By reducing the downswings without affecting the upswings.

• By increasing the portfolio's value.

What is a challenge associated with timing the market for hedging?

• It is difficult and can cut into overall returns.

• It can lead to increased returns.

• It is always accurate.

• It guarantees a perfect hedge.

What is a risk of using a short hedging position?

• The risk is limited to the initial investment.

• The risk is fixed and predictable.

• The risk is theoretically unlimited.

• The risk is always zero.

What analogy is used to describe the effect of hedging on a portfolio?

• A car accelerating uphill.

• A car in a lower gear slowing down.

• A ship sailing smoothly.

• A plane taking off.

What is a potential consequence of a poorly matched hedge?

• It guarantees higher returns.

• It can lead to large losses if both the portfolio and hedge lose value.

• It ensures a perfect match with the portfolio.

• It eliminates all risks.

What is the notional value of a futures contract based on?

• The current market index.

• The number of shares owned.

• The investor's portfolio size.

• The futures price and the contract multiplier.

In the example provided, what was the effect of the hedge on the portfolio's loss?

• It reduced the loss from 4% to 3.5%.

• It increased the loss to 5%.

• It had no effect on the loss.

• It eliminated the loss completely.

Why is it important to remove the hedge when the market is expected to recover?

• To avoid dragging down the portfolio during recovery.

• To ensure the hedge continues to protect the portfolio.

• To guarantee unlimited gains.

• To increase the costs associated with hedging.

What is the primary goal of hedging in a stock portfolio?

• To eliminate all market risks.

• To increase the portfolio's value during upswings.

• To guarantee a fixed return.

• To reduce potential losses during market downswings.