Suppose that today is December 31, 2021. Consider a hedge fund with the following investment strategy: buy high quality stocks and short-sell low quality ("junk") stocks. The hedge fund follows a beta- neutral strategy. The estimated betas of high and low quality stocks over the 01/2019 to 12/2021 time period are 1.01 and 1.32 respectively. If the hedge fund's gross leverage is capped at 2, then how much should the fund invest in low quality stocks? To answer this question, compute the weighted invested in low-quality ("junk") stocks at the end of 12/2021. (Hint: the sign matters) The answer should be given in decimal form with three decimals. For example, write 0.105 instead of 10.5 or 10.5 % when the correct answer is 10.5%.
Suppose that today is December 31, 2021. Consider a hedge fund with the following investment strategy: buy high quality stocks and short-sell low quality ("junk") stocks. The hedge fund follows a beta- neutral strategy. The estimated betas of high and low quality stocks over the 01/2019 to 12/2021 time period are 1.01 and 1.32 respectively. If the hedge fund's gross leverage is capped at 2, then how much should the fund invest in low quality stocks? To answer this question, compute the weighted invested in low-quality ("junk") stocks at the end of 12/2021. (Hint: the sign matters) The answer should be given in decimal form with three decimals. For example, write 0.105 instead of 10.5 or 10.5 % when the correct answer is 10.5%.
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
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Transcribed Image Text:Suppose that today is December 31, 2021. Consider a hedge fund with the following investment strategy: buy high quality stocks and short-sell low quality ("junk") stocks. The hedge fund follows a beta-
neutral strategy. The estimated betas of high and low quality stocks over the 01/2019 to 12/2021 time period are 1.01 and 1.32 respectively. If the hedge fund's gross leverage is capped at 2, then how much
should the fund invest in low quality stocks?
To answer this question, compute the weighted invested in low-quality_("junk") stocks at the end of 12/2021. (Hint: the sign matters)
The answer should be given in decimal form with three decimals. For example, write 0.105 instead of 10.5 or 10.5 % when the correct answer is 10.5 %.
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