Consider a passive mutual fund, an active mutual fund, and a hedge fund. The mutual funds...

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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)

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1 To calculate the hedge funds volatility we need to consider the volatility of the active mutual fu... View the full answer