Consider a hedge fund specializing in arbitrage strategies involving dual-listed companies and multiple share classes of the same firm. For this exercise you can make the following assumptions: the price spread between twin-stocks A and B fluctuates between -10 % and +10 % but the average value is zero (i.e., the twins have on average the same price). The CAPM betas of each stock pair is also the same. The hedge fund uses a dollar-neutral strategy to buy the relatively inexpensive twin and short the relatively expensive twin. The annualized average return on this arbitrage strategy is 8 % per year after all costs and fees. The standard deviation of the strategy return is 40 % per year. Which of the following statement is the most likely to be true? OA. The CAPM alpha of the strategy after fees is significantly higher than 8 % per year. OB. The CAPM alpha of the strategy after fees is significantly lower than 8% per year. OC. The CAPM alpha of the strategy after fees is close to 8% per year.
Consider a hedge fund specializing in arbitrage strategies involving dual-listed companies and multiple share classes of the same firm. For this exercise you can make the following assumptions: the price spread between twin-stocks A and B fluctuates between -10 % and +10 % but the average value is zero (i.e., the twins have on average the same price). The CAPM betas of each stock pair is also the same. The hedge fund uses a dollar-neutral strategy to buy the relatively inexpensive twin and short the relatively expensive twin. The annualized average return on this arbitrage strategy is 8 % per year after all costs and fees. The standard deviation of the strategy return is 40 % per year. Which of the following statement is the most likely to be true? OA. The CAPM alpha of the strategy after fees is significantly higher than 8 % per year. OB. The CAPM alpha of the strategy after fees is significantly lower than 8% per year. OC. The CAPM alpha of the strategy after fees is close to 8% per year.
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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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Consider a hedge fund specializing in arbitrage strategies involving dual-listed companies and multiple share classes of the same firm. For this exercise you can make the following assumptions: the price spread
between twin-stocks A and B fluctuates between -10 % and +10 % but the average value is zero (i.e., the twins have on average the same price). The CAPM betas of each stock pair is also the same. The hedge
fund uses a dollar-neutral strategy to buy the relatively inexpensive twin and short the relatively expensive twin. The annualized average return on this arbitrage strategy is 8 % per year after all costs and fees.
The standard deviation of the strategy return is 40 % per year. Which of the following statement is the most likely to be true?
O A. The CAPM alpha of the strategy after fees is significantly higher than 8 % per year.
O B. The CAPM alpha of the strategy after fees is significantly lower than 8 % per year.
OC. The CAPM alpha of the strategy after fees is close to 8 % per year.
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