A benefit of using derivatives in a portfolio management context, is that a deri

Question

A benefit of using derivatives in a portfolio management context, is that a derivative such as a Future: a. Allows for efficient trading or transactions, so the cost of trading is minimized, to some degree. b. Typically have large notional so portfolio decisions, such as asset allocation, can be implemented quickly and efficiently. c. Contracts with different underlying assets, exists so a manager can easily construct a suitable allocation or hedge given portfolio returns. d. Are tightly bound to the returns of the underlying, reducing tracking error and providing tight correlations. e. All of the above

Explanation / Answer

Answer is e : All of the Above.

Justification :

Derivatives provides following benefits:

1. Efficient Trading or transactions resulting into lower cost of trading.

2. Asset Allocation can be done quickly and efficiently.

3. Underlying assets are used so that manager can build good portfolio to get good returns.

4.Tracking of underlying returns is efficient so there is tight correlation and errors of tracking reduce to a certainly good level.

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