Reference no: EM133070742
For the next three questions, consider a market neutral hedge funds invested in the "Betting Against Beta" strategy. The strategy involves going long low beta stocks and short high beta stocks due to a view that investors have excess demand for high beta assets due to leverage constraints. In this particular strategy, the following assets can be traded
|
Asset class
|
Expected annual return
|
Market β
|
|
Risk free
|
2%
|
0
|
|
Portfolio of low β stocks
|
6%
|
0.5
|
|
Market portfolio
|
7%
|
1.0
|
|
Portfolio of high β stocks
|
8%
|
1.5
|
Let w_rf, w_low, w_market, and w_high denote the portfolio weights of the investment in each of the asset classes such that w_rf+w_low+w_market+w_high=1. According to its investment mandate, hedge fund AAA should target a gross leverage of 2. Which portfolio will this hedge fund hold?
a. w_rf=-1, w_low=1.5, w_market=0, w_high=-0.5
b. w_rf=-1, w_low=3, w_market=0, w_high=-1
c. w_rf=0, w_low=1.5, w_market=0, w_high=-0.5
d. w_rf=1, w_low=1, w_market=0, w_high=-1
f. w_rf=0, w_low=1, w_market=1, w_high=-1
g. w_rf=-1, w_low=-1, w_market=0, w_high=3