40. PPT #2 simulates a certain type of hedge fund style. Which style is it? A. C
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Question
40. PPT #2 simulates a certain type of hedge fund style. Which style is it?
A. Convertible Arbitrage
B. Equity Market Neutral
C. Event Driven
D. Long-Short Equity Hedge
E. Managed Futures
For Questions 41-43, use the following table below:
41. You only have two decision making tools at your disposal: the Sharpe Ratio or the Treynor Ratio. If you wanted to invest in the fund that manages systematic risk the best, which would you choose?
A. Fund A
B. Fund B
C. Fund C
D. Indifferent between A & C
E. Indifferent between B & C
42. You only have two decision making tools at your disposal: the Sharpe Ratio or the Treynor Ratio. If you wanted to invest in the fund that manages total risk the best, which would you choose?
A. Fund A
B. Fund B
C. Fund C
D. Indifferent between A & C
E. Indifferent between B & C
43. If you wanted to invest in the fund with the lowest idiosyncratic risk, which would you choose?
A. Fund A
B. Fund B
C. Fund C
D. Indifferent between A & C
E. Indifferent between B & C
44. You construct a 2 period binomial model for a stock that has a 80% chance of appreciating by 20% each period. Otherwise it will fall by 10%. The appropriate discount rate per period is 5%. Today the stock’s value is $200. How much would you pay for European Call Option that expires in two periods with a strike price of $220?
A. 39.47
B. 43.52
C. 68.00
D. This option is worthless because the stock price is below the strike price.
E. None of the Above.
45. You construct a 2 period binomial model for a stock that has a 20% chance of appreciating by 20% each period. Otherwise it will fall by 10%. The appropriate discount rate per period is 5%. Today the stock’s value is $200. How much would you pay for American Call Option that expires in two periods with a strike price of $220?
A. 2.47
B. 2.72
C. 3.81
D. This option is worthless because it is worth more dead than alive.
E. None of the Above.
Explanation / Answer
Ans)
40 Option D Long short Equity hedge Explation :-The equity hedge strategy is commonly referred to as long/short equity .In this strategy, hedge fund managers can either purchase stocks that they feel are undervalued or sell short stocks they deem to be overvalued. In most cases, the fund will have positive exposure to the equity markets so this is a hedge fund style.41 Sharpe ratio = (Mean portfolio return Risk-free rate)/Standard deviation of portfolio return PARTICULARS Fund A FUND B FUNDC Excess return (Rp-Rf) - 1 0.15 0.24 0.18 Fund Standard deviation-2 0.1 0.2 0.15 sharpe ratio 1/2 1.5 1.2 1.2 Fund A have higest sharpe ratio so Choose A .FUND A 42 Treynor ratio = (Mean portfolio return Risk-free rate)/Beta of the fund PARTICULARS Fund A FUND B FUNDC Excess return (Rp-Rf) - 1 0.15 0.24 0.18 Beta 1.2 0.95 1.1 Treynor ratio 1/2 0.125 0.252631579 0.163636 Fund B have higest Treynor ratio so Choose B. FUND B Total Variance=Systematic Variance+Unsystematic Variance Systematic Risk=market Unsystematic Risk=(Total VarianceSystematic Variance) PARTICULARS Fund A FUND B FUNDC Beta 1.2 0.95 1.1 std dev of market 0.081 0.081 0.081 Systamatic Risk Variance (beta*std dev of market)-1 0.009448 0.005921303 0.007939 Fund Standard deviation 0.1 0.2 0.15 Total variance- 2 0.01 0.04 0.0225 Unsystamatic risk variance=2-1 0.000552 0.034078698 0.014561 lowest idiosyncratic risk is A. FUND A 44 Prabability Year 1 0.8 200 0.2 180 160.0 Pay off 192.0 PVF @ 5% 1yr 0.9524 Expected Maket value 182.9 Strike Price 220.0 Strike price > market price Call option lapse so value is 0 Year 2 Expected value( Prob*value) 180 144 162 32.4 PVF @ 5% 2yrs 0.907029 176.4 45 Prabability Year 1 Expected 0.2 209 41.8 0.8 157 125.6 167.4 Expected marke valu =167.4 Strike price = 220 Strike price > market price Call option lapse so value is 0 Prabability year 2 Expected 0.2 288 57.6 0.8 216 172.8 230.4 0.907029 209 0.2 216 43.2 0.8 162 129.6 172.8 0.907029 157
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