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Davita Spencer is a manager at Half Dome Asset Management. She can generate an alpha of 2% a year up to $100 million.

This question was answered on May 23, 2010. View the Answer
Davita Spencer is a manager at Half Dome Asset Management. She can generate an alpha of 2% a year up to $100 million. After that her skills are spread too thin, so cannot add value and her alpha is zero. Half Dome charges a fee of 1% per year on the total amount of money under management (at the beginning of each year). Assume tht there are always investors lookign for positivie alpha and no investor would invest in a fund with a negative alpha. In equilibrium, that is, when no investor either takes out money or wishes to invest new money,

a. What alpha do investors in Davita's fund expect to receive?

b. How much money will Davita's fund expect to receive?

c. How much money will Half Dome generate in fee income?

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This question was asked on May 22, 2010 and answered on May 23, 2010.

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