Chapter 6: Q20_5B (page 685)
Which of the following would be the most appropriate benchmark to use for hedge fund evaluation?
a. A multifactor model.
b. The S&P 500.
c. The risk-free rate.
Option b.
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Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8, while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%.
a. If you currently hold a market-index portfolio, would you choose to add either of these portfolios to your holdings? Explain.
b. If instead you could invest only in bills and one of these portfolios, which would you choose?
During a particular year, the T-bill rate was 6%, the market return was 14%, and a portfolio manager with beta of .5 realized a return of 10%. Evaluate the manager based on the portfolio alpha.
Evaluate the timing and selection abilities of the four managers whose performances areplotted in the following four scatter diagrams.
Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?
Verify that the traditional tax shelter with a progressive tax (Spreadsheet 21.7) acts as a hedge. Compare the effect of a decline of 2% in the ROR to an increase of 2% in ROR.
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