v. (5 points) What do you think will be the effect on Hong Kong if a large amount of housing is built on the reclaimed islands and in the New Territories? Who do you think will benefit? Yv'ho do you think will lose? Can you think of a trading strategy that might make money om this insight? 2. A Global Perspective (a) {5 points} Emlain using a simple diagram of the capital market line why expanding a strategy to multiple countries and asset classes can increase Sharpe ratios. Cb) (5 points) Explain in words why expanding a strategy globally can increase CAPM alpha (when alpha is measured against the US equity market). (c) (5 points) Explain the Yale Model of endowment investing. (d) {5 points) Previously, endowments held a diversified portfolio of US equities' bonds' and cash. Why was the Yale Model considered a "tree lunch\"? 1 (e) [5 points) Why did David Swensen argue that Universities should tilt their portfolio towards equi- ties and away om safe assets? (t) [5 points) Why might the Yale Model be inappropriate for an individual investor? 3. Currency Trades (a) {5 points) Describe the mechanics of the FX carry trade. Cb) (30 points) Suppose the current spot exchange rate for USD and HKD is: US$31 buys I-lK$T.845. The interest rate in the US is 3% per year1 and the interest rate in HE is 2% per year. Furthermore, the markets expects the HR: currency peg will hold. The futures contract rate for USD and HKD also is: US$31 buys I-lKST'BLS. i. (5 points) At these market prices1 would you implement the carry trade? Why or why not? If you did' what would be the profitfloss? ii. (5 points) Suppose the carry trade is protable. Recall that the I-lKMA must maintain the peg. The I-lKMA has committed to buying I-lKD in exchange for USD. If interest rates do not change. what is the limiting factor to this support? 1A "free lunch" is an investment opportunity that increases returns without increasing risk