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Problem 227 of 333MediumFinanceP227
How much risk does a beta hedge remove?
A stock has annualized volatility 40%, the index has annualized volatility 20%, and their return correlation is 0.5. You are long $1M of the stock. (a) What is the stock's beta to the index? (b) What index position minimizes the variance of your hedged book? (c) What is the annualized volatility of the hedged book, in percent and in dollars?
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