Chapter 6: Q21_18I (page 712)
In addition to expected longevity, what traits might affect an individual’s demand for alife annuity?
Degree of risk aversion and bequest motive
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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.
The finance committee of an endowment has decided to shift part of its investment in an index fund to one of two professionally managed portfolios. Upon examination of past performance, a committee member proposes to choose the portfolio that achieved a greater alpha value.
a. Do you agree? Why or why not?
b. Could a positive alpha be associated with inferior performance? Explain.
You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the Canadian government bond will be hedged, and the six month discount on Canadian-dollar forward contracts is - .75% versus the U.S. dollar..
Calculate the expected price change required in the Canadian government bond that would result in the two bonds having equal total returns in U.S. dollars over a six-month horizon.
Assume that the yield on the U.S. bond is expected to remain unchanged.
Go to the Online Learning Center at www.mhhe.com/bkm , link to Chapter 20, and find there a spreadsheet containing monthly values of the S&P 500 Index. Suppose that in each month you had written an out-of-the-money put option on one unit of the index with an exercise price 5% lower than the current value of the index.
a. What would have been the average value of your gross monthly payouts on the puts over the 10-year period October 1977–September 1987? The standard deviation?
b. Now extend your sample by one month to include October 1987, and recalculate the average payout and standard deviation of the put-writing strategy. What do you conclude about tail risk in naked put writing?
With no taxes or inflation (Spreadsheet 21.1), what would be your retirement annuity if you increase the savings rate by 1%?
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