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An equity hedge fund manageer with an equity capital of $50 million sets his portfolio beta to zero in order to be market neutral. He retains a cash cushion of $2 million for unforseen situations (e.g. margin calls and redemption) and utilizes the rest of the equity capital in implementting market neutral strategy.
shares can be borrowed from a prime broker and the short margin ratio requirement m is set at 60% of short sales proceeds. Two mispriced stocks have been identified: A and B. At their current valuation, stock A is expected to yield 19.1% while stock B's expected return is 14.1%.
Suppose CAPM is the correct asset pricing model and the market index's expected return and risk free rate are 10% and 3% respectively. Stock A has a beta of 1.8 while that of stock B is 1.2.
The fund can earn an interest rate of 1% from its $2 million idle cash and the margin deposit with the prime broker. We assume that the hedge fund aims, as usual, to achieve the maximize degree of leverage possible.
Q) How should the hedge fund execute its market neutral strategy and what is the expected return of such strategy? Please show balance sheet of the fund, and compute the expected return and ex-ante alpha of the fund.
Agency law plays a big part in corporate responsibility (and liability). Differentiate between an employee and an independent contractor. What is the difference and what are the key factors that must be considered in determining one’s status as an em..
Your company has spent $300,000 on research to develop a new computer game. The firm is planning to spend $50,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $6,..
Consider an asset that costs $176,000 and is in a seven-year MACRS class. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $22,000. The relevant tax rate is 30 percent. What is the after-tax cash flow ..
Accounting profits are typically A) greater than economic profits because the former do not take explicit costs into account B) greater than economic because the former do not take implicit costs into account
If interest rates are positive, the present value of a future lump sum of $100 will be. An investment opportunity promises a stated interest rate of 6 percent with semi-annual compounding. Which of the following statements is most correct?
Gael Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 185,000 shares of stock outstanding. What is the value of the firm under each of the two pr..
While Steve Bouchard was a student at the University of Florida, he borrowed $12,000 in student loans at an annual interest rate of 9%. If Steve repays $1,500 per year, how long, to the nearest year, will it take him to repay the loan?
In light of Enron, WorldCom, option backdating, government bailouts/nationalizations and Madoff scandals, do you think U.S. equity markets are cleaner and more reliable than stock markets in the rest of the world?
By computing the increase in currency and reserves (a + b + c + e + f + h + i), confirm that the increase in monetary base is $100 million and thus the Fed balance sheet balances.
The useful life of the machine was expected to be four years with no residual value. Prepare the appropriate journal entries.
Does CMOS have an unrealized gain or loss on the derivative for the period? On the bonds? Will earnings increase or decrease due to the hedging arrangement? Why?
At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet (in thousands of dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only re..
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