The following table presents sample data for Bluewater (BW), a hedge fund. (Abstract from potential biases in
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The following table presents sample data for Bluewater (BW), a hedge fund. (Abstract from potential biases in the data.)
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Month 1 Month 2 0.95% -0.4% 0.18% 0.18% 0.19% -0.9% Return for BW Risk-free return Total market return Table 1: Data for BW Hedge Fund (a) Calculate annualized arithmetic and geometric average returns for BW. From the perspective of an investor in a hedge fund, discuss when each type of average return calculation is appropriate. (b) Suppose the annualized standard deviation of BW's excess returns is 3.15%. Cal- culate and interpret the annualized Sharpe Ratio (use the geometric average) for BW. (c) On regressing BW's monthly excess returns on the current market portfolio, you find RBWR=0.87% +0.25 (RM-Rf) + Et, with σ(e) = 2.74%. What is the monthly information ratio? Interpret this ratio. (d) You find out that BW's accounts do not necessarily reflect current prices of assets. Discuss how you will adjust the information ratio in response to stale prices. Month 1 Month 2 0.95% -0.4% 0.18% 0.18% 0.19% -0.9% Return for BW Risk-free return Total market return Table 1: Data for BW Hedge Fund (a) Calculate annualized arithmetic and geometric average returns for BW. From the perspective of an investor in a hedge fund, discuss when each type of average return calculation is appropriate. (b) Suppose the annualized standard deviation of BW's excess returns is 3.15%. Cal- culate and interpret the annualized Sharpe Ratio (use the geometric average) for BW. (c) On regressing BW's monthly excess returns on the current market portfolio, you find RBWR=0.87% +0.25 (RM-Rf) + Et, with σ(e) = 2.74%. What is the monthly information ratio? Interpret this ratio. (d) You find out that BW's accounts do not necessarily reflect current prices of assets. Discuss how you will adjust the information ratio in response to stale prices.
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Related Book For
Fundamentals of Investments
ISBN: 978-0132926171
3rd edition
Authors: Gordon J. Alexander, William F. Sharpe, Jeffery V. Bailey
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