Chapter 6: Q9B (page 685)
Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?
Answer
Many factors, as investment in liquid assets, backfill biases etc.
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What is the insurance aspect of the Social Security annuity?
If each of the nine outcomes in Problem 5 is equally likely, find the standard deviation of both the pound- and dollar-denominated rates of return.
Question: Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share.
The investor has \(10,000 to invest, and the current exchange rate is \)2/£
a. How many shares can the investor purchase?
b. Fill in the table below for rates of return after one year in each of the nine scenarios (three possible prices per share in pounds times three possible exchange rates).
| Price per share (￡) | Price denominated return (%) | Dollar-Denominated Return (%) for Year-End Exchange Rate | ||
1.80/￡ | 2.00/￡ | 2.20/￡ | ||
￡35 | ||||
￡40 | ||||
￡45 | ||||
c. When is the dollar-denominated return equal to the pound-denominated return?
With a traditional tax shelter (Spreadsheet 21.5), compare the effect on real consumption during retirement of a 1% increase in the rate of inflation to a 1% increase in the tax rate.
The chairman provides you with the following data, covering one year, concerning the portfolios of two of the fund’s equity managers (manager A and manager B). Although the portfolios consist primarily of common stocks, cash reserves are included in the calculation of both portfolio betas and performance. By way of perspective, selected data for the financial markets are included in the following table.
a. Calculate and compare the alpha of the two managers relative to each other and to the S&P 500.
b. Explain two reasons the conclusions drawn from this calculation may be misleading.
Bill Smith is evaluating the performance of four large-cap equity portfolios: funds A, B, C,and D. As part of his analysis, Smith computed the Sharpe ratio and the Treynor measurefor all four funds. Based on his finding, the ranks assigned to the four funds are as follows:
The difference in rankings for funds A and D is most likely due to:
a. A lack of diversification in fund A as compared to fund D.
b. Different benchmarks used to evaluate each fund’s performance.
c. A difference in risk premiums.
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