MBA 570x
Homework 1 – Due 10/3/2012
Individual works: 1. Chapter 11: 10 2. Chapter 12: 1, , !, ", # 3. Chapter 2 $%&'(: , !
1: Ch11/10 )h* do *ou think there is a +und o+ +und market +or hede +unds, -ut not +or mutual +unds nswer: Investors an inepensivel* rereate diversi+iation -* investin in various mutual +unds. 'ost investors do not have the a mount o+ apital needed to invest in multiple hede +unds to ahieve diversi+iation. In addition, while mutual +unds are ver* transparent a-out their investment strateies $whih are relativel* straiht +orward( and there is an entire industr* dediated to providin investors with anal*sis o+ mutual +unds, hede +unds are muh more opaue a-out their investment ativities and their strateies are more esoteri. s a result, the ost/reward ratio +or a +und o+ hede +unds is muh hiher than +or a +und o+ mutual +unds.
2. Chapter 12: 1 During the height of the nancial crisis in late 2008, the yield curve attened and the yield on the 0!year "reasury #ond reached an all!ti$e lo% of 2&52'& As a hedge fund $anager, su((ose you thin) the $ar)et has overreacted and %ill eventually correct correct itself, leading to a stee(ening in the yield curve& *hat trades $ight you execute in a long+short strategy to ta)e advantage of the situation Ans%er- .hort the 0!year "reasury/ long the !year "reasury&
3. Chapter 12: )h* did onverti-le ar-itrae strateies per+orm so poorl* in 200 In this trade, hede +unds o lon the onverti-le, and short the underl*in stok. )hen the temporar* short4-an was instituted in late 200, traders ould no loner hede their position -* shortin stok. s the stok market +ell, onverti-le values dropped, and the ina-ilit* to manae short positions ompounded the loss.
. Chapter 12: ! Assu$e you #uy 1,000 of a converti#le #ond at (ar, %hich %as oered at a 2&5' discount to its theoretical value& "he stoc) (rice on the day of (urchase is 15 and carries a ' dividend yield& "he converti#le #ond has a 3' cou(on, a conversion (re$iu$ of 20', and a delta of 54'& nterest inco$e fro$ the short (osition is &5', and stoc) #orro% cost is 0&25'& During a ! year holding (eriod, the stoc) $oves three ti$es& "he (ercentage change in stoc) (rice, corres(onding converti#le #ond value, and ne% delta ratio, in se6uential order are as follo%s- 7' + 1,07&2 + 4'/ 5' + 1,02& + 58'/ 3' + 1,02&7 + 40'& 9alculate the returns generated fro$ this invest$ent after one year, #ro)en out #y nco$e :eneration, Moneti;ing
ndervalued 9onverti#le& gnore transaction costs for the (ur(oses of this exercise& A.
!. Chapter 12: " M?@ $a)es a tender oer for =. at &5 M?@ shares (er =. share& M?@ %as trading at 130 (er share (rior to announce$ent and fell to 18 on announce$ent& =. %as trading at 130 (er share (rior to announce$ent and is no% trading at 150& f you are (ursuing a $erger ar#itrage strategy, %hat is the (osition you %ould set u( to create (otential invest$ent value *hat derivative transaction could you use to $itigate your ris) A- :o long =. shares and short M?@ shares at an a((roxi$ately 2 for ratio, res(ectively& =uts on =. $ay #e (urchased to li$it do%nside ris)&
5. Chapter 12: # *hy do you thin) distressed+restructuring hedge fund strategies did so (oorly in 2008 do%n 25' for the yearC A- "he invest$ent thesis for a distressed strategy is that the $ar)et is una#le to accurately value securities in distress& n 2008, the $ar)et %ent into a tails(in and credit dried u(, %hich $eans a distressed co$(any trying restructure its lia#ilities in an eort to restore valuation %ould have had a very dicult ti$e& "his %ould have further driven do%n the value of existing de#t securities as it decreased the li)elihood of the co$(any ree$erging fro$ distress& n addition, credit s(reads %idened signicantly in late 2008, es(ecially for Eun) rated de#t securities, %hich %ould have further de(ressed the value of hedge fundsF holdings& 7& 9ha(ter 23 BGMC- 3 Based on current dividend yields and ex(ected ca(ital gains, the ex(ected rates of return on (ortfolios A and B are 2' and 4', res(ectively& "he #eta of A is 0&7, %hile that of B is &3& "he "!#ill rate is currently 5', %hereas the ex(ected rate of return of the .H= 500 index is '& "he standard deviation of (ortfolio A is 2' annually, that of B is ', and that of the .H= 500 index is 8'& a& f you currently hold a $ar)et!index (ortfolio, %ould you choose add either of these (ortfolio to your holdings 9o$(are their al(ha& A is greater& #& f instead you could invest only in "!#ills and one of these (ortfolio %hich %ould you choose& 9o$(aring .har(e ratios, A is greater& 8& 9ha(ter 23 BGMC- 5 9onsider the t%o excess returnC index!$odel regression results for stoc)s A and B& the ris)!free rate over the (eriod %as 4', and the $ar)etFs average return %as 3'& =erfor$ance is $easured using an index $odel regression on excess returns&
a& 9o$(ute the statistics for each stoc) A B Al(ha ' 2' A((raisal ratio +0& 2+I& .har(e ratio 0&4!4C+2&4 8&3!4C+23&I "reynor $easure 0&4!4C+&2 8&3!4C+0&8 #& *hich stoc) is the #est choice under the follo%ing circu$stances i& "his is the only ris) asset to #e held #y the investor A, #ased on .har(e ratio ii& "he stoc) is to $ixed %ith the rest of the investorFs (ortfolio, currently co$(osed solely of holding in the $ar)et index fund B, #ased on al(ha& iii& "his is one of $any stoc)s that the investor is analy;ing to for$ an actively $anaged stoc) (ortfolio& A, #ased on the "reynor $easure&
Question: Performance Measurement Using Index Model Regression •
•
•
6osted on Deem-er 1, 2012 -* 'anish in 6ort+olio 'anaement 7his uestion appeared in one o+ the universit* eams +or port+olio manaement. I8ve provided the uestion alon with the detailed answer. Consider the two $eess return( inde4model reression results +or 6ort+olio and %. 7he risk4+ree rate over the period was 59, and the market8s averae return was 19. 6er+ormane is measured usin an inde model reression on eess returns. Results for Portfolio A
r – r + 19 ; 1.2$r ' – r +( <4suare 0.!"= tandard deviation o+ $r 4r +( 25.19.
Results for Portfolio B
r % – r + 29 ; 0.$r ' – r +( <4suare 0.3= tandard deviation o+ $r % 4r +( 2.#9. Solution
7o ompute the >harpe measure, note that +or eah port+olio, $r p – r +( an -e omputed +rom the riht4hand side o+ the reression euation usin the assumed parameters r ' 19 and r + 59. 7he standard deviation o+ eah stok8s returns is iven in the pro-lem. 7he -eta to use +or the 7re*nor measure is the slope oe++iient o+ the reression euation presented in the pro-lem.
%
lpha is the interept o+ the reression $a(
19
29
In+ormation ratio or ppraisal ratio a/s$e(
19/10.39( 0.0#"
29/ 1#.19 0.10"
$19 ; 1.2$19 – 59((/25.19
$29 ; 0.$19 – 59((/2.#9
0.051
0.33"3
$19 ; 1.2$19 – 59((/1.2
$29 ; 0.$19 – 59((/0.
>harpe measure $r p – r +( / s
7re*nor measure $r p – r +( / -
0.33
10.!
