Hedge funds are institutions that invest in a wide variety of instruments, from stocks and bonds to commodities and real estate. One of the reasons for the success of this industry is that it manages expected return and risk better than other financial institutions. Using the concepts and ideas described in this chapter, discuss how a hedge fund might maximize expected return and minimize risk by investing in various financial instruments. Include in your discussion the concepts of means and variances of linear composites of random variables and the concept of independence.

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