Which of the following is a reason for hedging a portfolio with an index futures?
A. The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market
B. The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well
C. The portfolio is not well diversified and so its return is uncertain
D. All of the above
A
Index futures can be used to remove the impact of the performance of the overall market on the portfolio. If the market is expected to do well hedging against the performance of the market is not appropriate. Hedging cannot correct for a poorly diversified portfolio.
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