Consider a passive mutual fund, an active mutual fund, and a hedge fund. The mutual funds...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider a passive mutual fund, an active mutual fund, and a hedge fund. The mutual funds claim to deliver the following gross returns: passive fund before fees active fund before fees = = stock index stock 2.20%+stock index + Et The stock index has a volatility of var (stock index = 15%. The active mutual fund has a tracking error with a mean of E (t) = 0, a volatility of √var (t) = 3.5%, and Cov (et, rstock index ) = 0 such that it's beta to the stock index is 1. The passive fund charges an annual fee of 0.10% and the active mutual fund charges a fee of 1.20%. The hedge fund uses the same strategy as the active mutual fund to identify "good" and "bad" stocks, but implements the strategy as a long-short hedge fund, applying 4 times leverage. The risk-free interest rate is rf = 1% and the financing spread is zero (meaning that borrowing and lending rates are equal). Therefore, the hedge fund's return before fees is r 1% + 4 × (ractive fund before fees-stock index ) hedge fund before fees 1. What is the hedge fund's volatility? (0.5pt) 2. What is the hedge fund's beta? (0.5pt) 3. What is the hedge fund's alpha before fees (based on the mutual fund's alpha estimate)? (0.5pt) Consider a passive mutual fund, an active mutual fund, and a hedge fund. The mutual funds claim to deliver the following gross returns: passive fund before fees active fund before fees = = stock index stock 2.20%+stock index + Et The stock index has a volatility of var (stock index = 15%. The active mutual fund has a tracking error with a mean of E (t) = 0, a volatility of √var (t) = 3.5%, and Cov (et, rstock index ) = 0 such that it's beta to the stock index is 1. The passive fund charges an annual fee of 0.10% and the active mutual fund charges a fee of 1.20%. The hedge fund uses the same strategy as the active mutual fund to identify "good" and "bad" stocks, but implements the strategy as a long-short hedge fund, applying 4 times leverage. The risk-free interest rate is rf = 1% and the financing spread is zero (meaning that borrowing and lending rates are equal). Therefore, the hedge fund's return before fees is r 1% + 4 × (ractive fund before fees-stock index ) hedge fund before fees 1. What is the hedge fund's volatility? (0.5pt) 2. What is the hedge fund's beta? (0.5pt) 3. What is the hedge fund's alpha before fees (based on the mutual fund's alpha estimate)? (0.5pt)
Expert Answer:
Answer rating: 100% (QA)
1 To calculate the hedge funds volatility we need to consider the volatility of the active mutual fu... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
Mutual Fund A charges an annual management fee of 2.38% of money under management. The corresponding management fee for Mutual Fund B is 1.65%. On the same invested amount, what percentage more fees...
-
Consider a hedge fund that has an annual fee structure of 1.5 percent base management fee plus a 15 percent incentive fee applied to profits above the risk-free rate. If the risk-free rate is 5.5...
-
Consider a hedge fund whose annual fee structure has a fixed fee and an incentive fee with a high-water mark provision. The fund manager earns an incentive fee only if the fund is above the...
-
Why have some firms gone to voluntary benefits as opposed to discretionary benefits?
-
How would you expect a fall in a countrys population to alter its aggregate money demand function? Would it matter if the fall in population were due to a fall in the number of households or to a...
-
The issuing company Zapatos y Bolsas Veloz, SAB de C.V., dedicated to the manufacture and sale of vinyl leather bags for more than 25 years under the Bolsas Finas brand, the company obtained in the...
-
Why is it important to establish the meaning of talent and talent management in a particular organizational setting?
-
Liquid water enters a 25-kW pump at 100-kPa pressure at a rate of 5 kg/s. Determine the highest pressure the liquid water can have at the exit of the pump. Neglect the kinetic and potential energy...
-
What strategies can knowledge managers employ to effectively bridge the gap between explicit and tacit knowledge domains, thereby facilitating seamless knowledge transfer across disparate...
-
Refer to Exercise 29 of Section 4.2. For what values of h will a sensitivity analysis on the effect of a change of h pounds of peat be valid? In exercise A lawn and garden store creates three...
-
Calculate the element quality of a quadrilateral element with the shape shown below. 1.0 mm NOT TO SCALE 0.9964 (4.d.p) 0.9953 (4.d.p) 1.0500 (4.d.p) 1.0000 (4.d.p) O 1.0427 (4.d.p) 1.0 mm 1.1 mm
-
The spreadsheet in Table 1 provides data on the U.S. economy: Column A is the year; the other columns are quantities sold in millions per year of compact discs (column B), music videos (column C),...
-
Return to Table 7.12. In the top half of the table, at what point does diminishing marginal productivity kick in? What about in the bottom half of the table? How do you explain this? Table 7.12...
-
An April 2014 study by researchers at University College London found that people who ate seven or more portions of fruits and vegetables a day had a \(42 \%\) lower risk of death at any point in...
-
In June 2014, the international price of crude oil was about \$114 per barrel (Brent benchmark). Three years later, it was about \(\$ 47\) per barrel. This dramatic price reduction caused petroleum...
-
Are law and ethics the same thing?
-
Sayon Company renders repair services to its customers. During the month, the company had the following customers: Customer A was billed 25,000, VAT-exclusive, and the entire bill was paid during the...
-
Cable Corporation is 60% owned by Anna and 40% owned by Jim, who are unrelated. It has noncash assets, which it sells to an unrelated purchaser for $100,000 in cash and $900,000 in installment...
-
A U.S. institutional investor has invested in a portfolio of stocks in India. The annual inflation rate is 6 percent in India and 2.5 percent in the United States. a. If the purchasing power parity...
-
A European corporation has issued bonds with a par value of SFr 1,000 and an annual coupon of 5 percent. The last coupon on these bonds was paid four months ago, and their current clean price is 90...
-
Following are some statistics for Malaysia, the Philippines, and the United States. Inflation Rates: Annual Rates in Percent per Year Exchange Rate per U.S. Dollar: Annual Average In 1997, Malaysia...
-
In a recent study of how mice negotiate turns, the mice ran around a circular 90 turn on a track with a radius of 0.15 m. The maximum speed measured for a mouse (mass = 18.5 g) running around this...
-
It is well known that runners run more slowly around a curved track than a straight one. One hypothesis to explain this is that the total force from the track on a runners feet the magnitude of the...
-
You are driving your car through a roundabout that has a radius of 9.0 m. Your physics textbook is lying on the seat next to you. What is the fastest speed at which you can go around the curve...
Study smarter with the SolutionInn App