A fund manager owns a portfolio of 10 stocks. Explain how the manager can reduce the systematic risk of his portfolio by 10% over the next year using futures. Will the expected return on the manager’s portfolio also drop by 10%? Is it possible for the manager to perfectly hedge his exposure to equity risk? Explain your answers.
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A fund manager owns a portfolio of 10 stocks. Explain how the manager can reduce the systematic risk of his portfolio by 10% over the next year using futures. Will the expected return on the manager’s portfolio also drop by 10%? Is it possible for the manager to perfectly hedge his exposure to equity risk? Explain your answers.
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- Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund? (Hint: first calculate the weights, then calculate the beta of the portfolio and then calculate the required return of the portfolio.) Show your work. Stock Amount Weights Beta A $1,075,000 ? 1.20 B 675,000 ? 0.50 C 750,000 ? 1.40 D 500,000 ? 0.75 $3,000,000As a fund manager in Bull & Bear Securities, you are given the following information regarding your portfolio. Rate of Return if State Occurs {:[" State of "],[" Economy "]:} {:[" Probability of "],[" State of Economy "]:} Stock A Stock B Stock C Boom .72 .06 .11 .17 Bust .28 .19 -.04 .23 Based on the above information, compute the following: i) The expected return in boom economy for all the three stocks. ii) The expected return in bust economy for all the three stocks. iii) The expected return for the portfolio that invest 30 percent each in A and B and 40 percent in C. iv) The standardHow can a mutual fund manager who follows a momentum trading strategy expect to earn above - average return 1. Provided the stock price has been decreasing below the mean reversion point and other investors follow a mean reversion strategy the fund manager is likely to earn an above average return 2. If the fund manager follows a momentum strategy and buys a stock as the price is increasing while other investors follow a mean reversion strategy, then it is likely the stock price will continue to rise 3. Provided the stock price have been rising above the mean reversion point and other investors follow a mean reversion strategy, the fund manager is likely to earn an above average return 4. If the fund manager follows a momentum strategy and buys a stock as the price is increasing and other investors also follow a momentum strategy, then it is likely the stock price will continue to rise
- Suppose that today is December 31, 2021. Consider a hedge fund with the following investment strategy: buy high quality stocks and short-sell low quality ("junk") stocks. The hedge fund follows a beta- neutral strategy. The estimated betas of high and low quality stocks over the 01/2019 to 12/2021 time period are 1.01 and 1.32 respectively. If the hedge fund's gross leverage is capped at 2, then how much should the fund invest in low quality stocks? To answer this question, compute the weighted invested in low-quality_("junk") stocks at the end of 12/2021. (Hint: the sign matters) The answer should be given in decimal form with three decimals. For example, write 0.105 instead of 10.5 or 10.5 % when the correct answer is 10.5 %.A portfolio consists of assets with the following expected returns (refer to image): a. What is the expected return on the portfolio if the investor spends an equal amount on each asset? b. What is the expected return on the portfolio if the investor puts 50 percent of available funds in technology stocks, 10 percent in pharmaceutical stocks, 24 percent in utility stocks, and 16 percent in the savings account?Suppose that today is December 31, 2021. Consider a hedge fund with the following investment strategy: buy high quality stocks and short-sell low quality ("junk") stocks. The hedge fund follows a beta- neutral strategy. The estimated betas of high and low quality stocks over the 01/2019 to 12/2021 time period are 1.01 and 1.32 respectively. If the hedge fund's gross leverage is capped at 2, then how much should the fund invest in high quality stocks? To answer this question, compute the weighted invested in high-quality stocks at the end of 12/2021. (Hint: the sign matters) The answer should be given in decimal form with three decimals. For example, write 0.105 instead of 10.5 or 10.5 % when the correct answer is 10.5 %.
- If you desire to forecast performance of a mutual fund for next year, the best forecast will be given by the a. geometric average return b. neither geometric average return nor arithmetic average return c. arithmetic average return d. both geometric average return and arithmetic average return You buy and hold a S&P 500 index fund. You always reinvest your dividends earned on the fund. Which method provides the best measure of the actual average historical performance of the investments you have chosen? a. both geometric average return and arithmetic average return b. neither geometric average return nor arithmetic average return c. arithmetic average return d. geometric average returnIf an investor that owns a portfolio with 3 stocks increases their portfolio to 30 stocks, which of the following is MOST LIKELY to happen? Select one: a. risk will increase b. risk would decrease c. Systematic risk would increase d. return would increaseAs an equity analyst, you have developed the following return forecasts and risk estimates for two different stock mutual funds (Fund T and Fund U): Fund T Fund U Forecasted Return 9.0% 10.0 CAPM Beta 1.20 0.80 a) If the risk-free rate is 3.9 % and the expected market risk premium is 6.1%, calculate the expected return for each mutual fund according to the CAPM. b) Using the estimated expected returns from Part a along with your own return forecasts, explain whether Fund T and Fund U are currently priced to fall directly on the security market line (SML), above the SML, or below the SML. Are Funds T and U overvalued, undervalued, or properly valued?
- Consider a portfolio manager with a $20,500,000 equity portfolio under management. The manager wishes to hedge against a decline in share values using stock index futures. Currently a stock index future is priced at 1250 and has a multiplier of 250. The portfolio beta is 1.25. Calculate the number of contract required to hedge the risk exposure and indicate whether the manager should be short or long. 82 contracts long. 100 contract short. 82 contracts short. 100 contracts long.1. Clearly explain why some risks are systematic and others non-systematic. How is it possible for an investor to control the level of non-systematic risk in a portfolio but not the level of systematic risk? 2. John is considering an investment in these two stocks, Stock A and Stock B, and has come to you for advice whether to buy and/or avoid any of the stocks. Stock A has a beta of 1.15 and an expected return of 14%. Stock B has a beta of 0.7 and an expected return of 9%. If the risk free rate is 5% and the market return is 12%, what will be your best recommendation to John? 3. What advice would you give to a client who is confused about the concept that in a well-functioning market all assets will have the same reward to risk ratio? Your answer should cover the following issues: i.How would we expect that all assets have the same reward to risk ratio? ii. How can an investor increase his/her returns if this holds true.As an equity analyst, you have developed the following return forecasts and risk estimates for two different stock mutual funds (Fund T and Fund U): Forecasted Return CAPM Beta Fund T 9.00% 1.20 Fund U 10.00% 0.80 If the risk-free rate (RFR) is 3.9% and the expected market risk premium (ie., E(Ra) – RFR) is 6.1%, calculate the expected return for each mutual fund according to the 3.а. САРМ. 3.b. Decide which fund is overvalued, undervalued or properly valued and explain why?