Chapter 6: Q2B (page 684)
A fund manages a \(1.2 billion equity portfolio with a beta of .6. If the S&P contract multiplier is \)250 and the index is currently at 800, how many contracts should the fund sell to make its overall position market neutral?
3,600 contracts
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Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?
John Irish, CFA, is an independent investment adviser who is assisting Alfred Darwin, the head of the Investment Committee of General Technology Corporation, to establish a new pension fund. Darwin asks Irish about international equities and whether the Investment Committee should consider them as an additional asset for the pension fund.
a. Explain the rationale for including international equities in General’s equity portfolio. Identify and describe three relevant considerations in formulating your answer.
b. List three possible arguments against international equity investment, and briefly discuss the significance of each.
c. To illustrate several aspects of the performance of international securities over time, Irish shows Darwin the accompanying graph of investment results experienced by a U.S. pension fund in the recent past. Compare the performance of the U.S.-dollar and non-U.S.-dollar equity and fixed-income asset categories, and explain the significance of the result of the account performance index relative to the results of the four individual asset class indexes.
Renée Michaels, CFA, plans to invest $1 million in U.S. government cash equivalents for the next 90 days. Michaels’s client has authorized her to use non-U.S. government cash equivalents, but only if the currency risk is hedged to U.S. dollars by using forward currency contracts.
a. Calculate the U.S.-dollar value of the hedged investment at the end of 90 days for each of the two cash equivalents in the table below. Show all calculations.
b. Briefly explain the theory that best accounts for your results.
c. Based upon this theory, estimate the implied interest rate for a 90-day U.S. government cash equivalent.
A hedge fund with $1 billion of assets charges a management fee of 2% and an incentive fee of 20% of returns over a money market rate, which currently is 5%. Calculate total fees, both in dollars and as a percent of assets under management, for portfolio returns of:
a. 2 5%
b. 0
c. 5%
d. 10%
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?
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