Chapter 6: Q1B (page 662)
For Questions 1–4, answer true or false. Explain your answer.
Question: Due to currency risk, dollar-denominated returns of international portfolios will have a higher standard deviation than local-currency-denominated returns.
False
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Suppose that the spot price of the euro is currently \(1.30. The one-year futures price is \)1.35. Is the U.S. interest rate higher than the euro rate?
Which of the following hedge fund types is most likely to have a return that is closest to risk-free?
a. A market-neutral hedge fund.
b. An event-driven hedge fund.
c. A long-short hedge fund.
Why does a progressive tax code produce a retirement annuity for a middle-class household that is similar to that which would follow from a flat tax?
After much research on the developing economy and capital markets of the country ofOtunia, your firm, GAC, has decided to include an investment in the Otunia stock marketin its Emerging Markets Commingled Fund. However, GAC has not yet decidedwhether to invest actively or by indexing. Your opinion on the active versus indexing decisionhas been solicited.
The following is a summary of the research findings:
Otunia’s economy is fairly well diversified across agricultural and natural resources, manufacturing(both consumer and durable goods), and a growing finance sector. Transaction costs in securitiesmarkets are relatively large in Otunia because of high commissions and government “stamp taxes”on securities trades. Accounting standards and disclosure regulations are quite detailed, resultingin wide public availability of reliable information about companies’ financial performance.
Capital flows into and out of Otunia, and foreign ownership of Otunia securities is strictly regulatedby an agency of the national government. The settlement procedures under these ownership rulesoften cause long delays in settling trades made by non-residents. Senior finance officials in the governmentare working to deregulate capital flows and foreign ownership, but GAC’s political consultantbelieves that isolationist sentiment may prevent much real progress in the short run.
a. Briefly discuss aspects of the Otunia environment that favor investing actively, andaspects that favor indexing.
b. Recommend whether GAC should invest in Otunia actively or by indexing. Justifyyour recommendation based on the factors identified
How might the incentive fee of a hedge fund affect the manager’s proclivity to take on high-risk assets in the portfolio?
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