3. You are the manager of a medium-sized hedge fund, and the recent fluctuations in thecapital markets have attracted your attention. In particular, the prices of stocks and bondshave now dropped to what you consider to be unprecedentedly attractive levels. Althoughyou expect the prices of these investments to rise in the near future, your hedge fund iscurrently cash-constrained due to an unforeseen redemption wave; "fire-selling" the bestholdings in your portfolio is not a practical way to generate investable funds. Further, thenext round of incoming cash flows from new investor subscriptions and from the existinginvestments are not expected to occur for approximately three months.a. Briefly explain the details of two investment strategies that employ derivative instru-ments that would allow you to take advantage of the anticipated market rally.b. What are the benefits and potential risk factors for undertaking these derivative strat-egies in lieu of direct cash-oriented investments?

Answer: Given that the bond and share prices are at all time low, we anticipate a rally in the…

Answered: 3. You are the manager of a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

“If markets are semistrong-form efficient, investors would only adopt passiveinvestment strategies and buy into an index fund, rather than active strategies wherethey would have a portfolio manager select the components of their portfolios andseek for mispriced equities.” Explain if true or not
You are a portfolio manager for a wealthy individual who is interested in investing in the stock market. The individual is risk-averse and wants to maximize returns while minimizing risk. Which of the following asset classes would be most appropriate for a well-diversified portfolio? Stocks only Bonds only A mix of stocks, bonds, and other asset classes Real estate only
Question 5 a) “If markets are semistrong-form efficient, investors would only adopt passive investment strategies and buy into an index fund, rather than active strategies where they would have a portfolio manager select the components of their portfolios and seek for mispriced equities.” Explain if you agree with this statement, in no more than 150 words.
Give typing answer with explanation and conclusion Nelson is faced with a conundrum as a hedge fund manager. He could choose to invest a new client’s wealth in a fairly new and conservative opportunity, but this option has no track record that can be relied on. On the other hand, he could invest it in a copper mine that is seeking capital to expand its infrastructure as there may be a boom in this industry in the near future. From the scenario provided, which key concepts are present? (Exercise caution when answering this question as multiple responses may be correct.) 1. Return 2.Reward 3. Investment 4.Risk 5.Uncertainty
Which of the following defines a hedge fund the most? 1. A collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. 2. A negotiable security that represents securities of a foreign company and allows that company's shares to trade in the U.S. financial markets. 3. A diversified portfolio that typically does not limit the number of shares it can offer, and they are bought and sold on demand. 4. A type of investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio construction and risk-management techniques to improve performance.
7
some executive contend that they need to adopt a short-term orientation given the average holding period for stocks in professionally managed funds nowadays has dropped to less than one year. Thus, there is no need to consider the interest of long-term shareholders since there are none. comment on this reasoning.
You recently found out that when the market is in recession, ALL assets seem to suffer from some degree of liquidity problems as there are less trades than usual, and thus it is hard to sell an asset without losing some of its fair value. So, you concluded that at least some portion of liquidity risk must be systematic in nature and therefore it must be compensated by the market. To verify this, you cut the market portfolio in half by the illiquidity measure developed by Amihud (2002) [So that you have one relatively liquid portfolio and one relatively illiquid portfolio. Assume that this measure is reliable.] and calculated the market liquidity risk premium as follows: Market liquidity risk premium = Expected return on the illiquid portfolio - Expected return on the liquid portfolio = [E(RIL) - E(RL)] Then you formed 5 portfolios from the entire market based on liquidity (Amihud measure) and estimate the factor loading β (called liquidity beta) of each portfolio using [RIL - RL] as…
What is the primary trading cost for a hedge fund that manages a large fund (e.g., $1 billion in total equity capital). O A. Commissions B. Bid-ask spreads. O. The slope of the market impact (or price impact) curve. O D. Large hedge funds benefit from economies of scale when it comes to trading costs, in which case none of the above are important.
Which one of the following expressions about risk and returns is wrong? A. In general, one reason why a stock is riskier than a bond is that because cash flows from a bond are known and promised, whereas cash flows from a stock are neither known nor promised. B. According to CAPM model, a well-diversified portfolio will have a beta which equals to 0. C. Risk premium is the extra return provided on risky assets to compensate for risk. The difference between risky return and the risk-free return. D. Unexpected return happened because new information came to light which caused our expectations about prices and returns to change.
1. A credit portfolio manager is expecting corporate credit spreads to widen over the next several months. What are two ways that she can take advantage of the excess return (+coupon payments) relative to risk-free assets (i.e. treasuries) but limit the impact of the expected moves?
Describe clearly how theories from behavioural finance can justify the following abnormal phenomena of investment: (1) Investors exhibit tendency to overpay for assets with poor average return but a potential to deliver a huge payoff, such as penny stocks or corporate bonds of financially distressed companies. (2) Investors exhibit tendency to sell winning stocks too early but hold losing stocks for too long

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