Assume that you manage a 13 million portfolio that

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32. Assume that you manage a \$1.3 million portfolio that pays no dividends, has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1220. If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of \$250). A. selling 1 B. selling 6 C. buying 1 D. buying 6 E. selling 4 The hedge ratio is [\$1.3M/(1220 x 250)] x 1.45 = 6.18. Thus, you would need to sell 6 contracts. Difficulty: Difficult 26-15

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Chapter 26 - Hedge Funds 33. Assume that you manage a \$2 million portfolio that pays no dividends, has a beta of 1.25 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1300. If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of \$250). The hedge ratio is [\$2M/(1300 x 250)] x 1.25 = 7.69. Thus, you would need to sell 8 contracts. Difficulty: Difficult 34. Assume that you manage a \$2 million portfolio that pays no dividends, has a beta of 1.3 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1500. If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of \$250). The hedge ratio is [\$2M/(1500 x 250)] x 1.3 = 6.93. Thus, you would need to sell 7 contracts. Difficulty: Difficult 26-16
Chapter 26 - Hedge Funds 35. Market neutral bets can result in ______ volatility because hedge funds use ______. Market neutral bets can result in considerable volatility because hedge funds use considerable leverage. Difficulty: Moderate 36. Hedge funds exhibit a pattern known as a A. January effect B. Santa effect C. size effect D. book-to-market E. none of the above Hedge funds exhibit a pattern known as a Santa effect. Difficulty: Moderate 37. ______ bias arises because hedge funds only report returns to database publishers if they want to. Backfill bias arises because hedge funds only report returns to database publishers if they want to. Difficulty: Moderate 26-17

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Chapter 26 - Hedge Funds
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• Spring '10
• HAMZA

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