Chapter 6: Q10I (page 663)
If you were to invest $10,000 in the British bills of Problem 9, how would you lock in the dollar-denominated return?
£6,173.43
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Use the following information to answer Problems l2–16:
Primo Management Co. is looking at how best to evaluate the performance of its managers. Primo has been hearing more and more about benchmark portfolios and is interested in trying this approach. As such, the company hired Sally Jones, CFA, as a consultant to educate the managers on thebest methods for constructing a benchmark portfolio, how best to choose a benchmark, whether the style of the fund under management matters, and what they should do with their global funds in terms of benchmarking.
For the sake of discussion, Jones put together some comparative two-year performance numbers that relate to Primo’s current domestic funds under management and a potential benchmark.
As part of her analysis, Jones also takes a look at one of Primo’s global funds. In this particular portfolio, Primo is invested 75% in Dutch stocks and 25% in British stocks.
The benchmark invested 50% in each—Dutch and British stocks. On average, the British stocks outperformed the Dutch stocks. The euro appreciated 6% versus the U.S. dollar over the holding period, while the pound depreciated 2% versus the dollar. In terms of the local return, Primo outperformed the benchmark with the Dutch investments but underperformed the index with respect to the British stocks.
Question: If Primo decides to use return-based style analysis, will the R2 of the regression equation of a passively managed fund be higher or lower than that of an actively managed fund?
How might the incentive fee of a hedge fund affect the manager’s proclivity to take on high-risk assets in the portfolio?
Under the provisions of a typical corporate defined benefit pension plan, the employer isresponsible for:
a. Paying benefits to retired employees.
b. Investing in conservative fixed-income assets.
c. Counseling employees in the selection of asset classes.
d. Maintaining an actuarially determined, fully funded pension plan.
Reconsider the hedge fund in the previous problem. Suppose it is January 1, the standard deviation of the fund’s annual returns is 50%, and the risk-free rate is 4%. The fund has an incentive fee of 20%, but its current high water mark is \(66, and net asset value is \)62.
a. What is the value of the annual incentive fee according to the Black-Scholes formula?
b. What would the annual incentive fee be worth if the fund had no high water mark and it earned its incentive fee on its total return?
c. What would the annual incentive fee be worth if the fund had no high water mark and it earned its incentive fee on its return in excess of the risk-free rate? (Treat the risk-free rate as a continuously compounded value to maintain consistency with the Black-Scholes formula.)
d. Recalculate the incentive fee value for part (b ) now assuming that an increase in fund leverage increases volatility to 60%.
Suppose a hedge fund follows the following strategy: Each month it holds \(100 million of an S&P 500 Index fund and writes out-of-the-money put options on \)100 million of the index with exercise price 5% lower than the current value of the index. Suppose the premium it receives for writing each put is $.25 million, roughly in line with the actual value of the puts.
a. Calculate the Sharpe ratio the fund would have realized in the period October 1982–September 1987. Compare its Sharpe ratio to that of the S&P 500. Use the data from the previous problem available at the Online Learning Center, and assume the monthly risk-free interest rate over this period was .7%.
b. Now calculate the Sharpe ratio the fund would have realized if we extend the sample period by one month to include October 1987. What do you conclude about performance evaluation and tail risk for funds pursuing option like strategies?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
