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3330%20PS8 - Cornell University Fall 2009 Economics 3330...

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Cornell University Fall 2009 Economics 3330: Problem Set 8 Due 12/4/09 1. A hedge fund has a net asset value of $62 per share and a high water mark of $66. The standard deviation of the fund’s annual returns is 50% and the risk-free rate is 4%. The incentive fee is 20%. All answers should be given in terms of one year. a. According to Black-Scholes, what is the value of the incentive fee? b. What would the incentive fee be worth if the fund had no high water mark? c. Suppose that the fund is contemplating a change in strategy that would increase the standard deviation of returns to 100%. How would your answers to (a) and (b) change under the new strategy? 2. Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 12% and 16%, respectively. The beta of A is 0.7, while that of B is 1.4. The T-bill rate is currently 5%, whereas the expected rate of return of the S&P 500 index is 13%. The standard deviation of portfolio A is 12% annually, that of B is 31%, and that of the S&P 500 index is 18%.
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