(a) To calculate: The average value, the standard deviation, and sharpe ratio over the 10-year period i.e. October 1977 − September 1987 . Introduction: Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Question

A hedge fund with net asset value of $108 per share currently has a high-water mark of $115. Suppose it is January 1, the standard deviation of the fund's annual returns is 45%, and the risk-free rate is 4%. The fund has an incentive fee of 16% of annual returns, but its current high-water mark is $115, and net asset value is $108. Required: a. What is the value of the annual incentive fee according to the Black-Scholes formula? (Treat the risk-free rate as a continuously compounded value to maintain consistency with the Black-Scholes formula.) Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What would the annual incentive fee be worth if the fund had no high-water mark and it earned its incentive fee on its total return? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. What would the annual incentive fee be worth if the fund had no high-water mark and it earned its incentive fee on its return in excess of…

Answer 1

Question

Chapter 26, Problem 13PS

Summary Introduction

(a)

To calculate:

The average value, the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 .

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Summary Introduction

(b)

To calculate:

The average value and the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 with an extension of one month to include in calculation i.e. October 1987 .

Introduction:

The put options are those type of options in which the expectation is of price fall of that stock. The writer of put options earn gain on these from the excess of strike price over stock price.

Summary Introduction

(c)

To detemine:

The observation about the risk for funds doing options and evaluation of performance of such funds.

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

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A hedge fund with net asset value of $108 per share currently has a high-water mark of $115. Suppose it is January 1, the standard deviation of the fund's annual returns is 45%, and the risk-free rate is 4%. The fund has an incentive fee of 16% of annual returns, but its current high-water mark is $115, and net asset value is $108. Required: a. What is the value of the annual incentive fee according to the Black-Scholes formula? (Treat the risk-free rate as a continuously compounded value to maintain consistency with the Black-Scholes formula.) Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What would the annual incentive fee be worth if the fund had no high-water mark and it earned its incentive fee on its total return? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. What would the annual incentive fee be worth if the fund had no high-water mark and it earned its incentive fee on its return in excess of…

A hedge fund with net asset value of $68 per share currently has a high water mark of $74. Suppose it is January 1, the standard deviation of the fund's annual returns is 38%, and the risk-free rate is 6%. The fund has an incentive fee of 10%. a. What is the value of the annual incentive fee according to the Black-Scholes formula? (Treat the risk-free rate as a continuously compounded value to maintain consistency with the Black-Scholes formula.) (Do not round intermediate calculations. Round your answer to 3 decimal places.) Annual incentive fee Annual incentive fee b. What would the annual incentive fee be worth if the fund had no high water mark and it earned its incentive fee on its total return? (Do not round intermediate calculations. Round your answer to 3 decimal places.) per share Annual incentive fee per share. c. What would the annual incentive fee be worth if the fund had no high water mark and it earned its incentive fee on its return in excess of the risk-free rate? (Do…

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 %.

Answer 2

Question

Chapter 26, Problem 13PS

Summary Introduction

(a)

To calculate:

The average value, the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 .

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Summary Introduction

(b)

To calculate:

The average value and the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 with an extension of one month to include in calculation i.e. October 1987 .

Introduction:

The put options are those type of options in which the expectation is of price fall of that stock. The writer of put options earn gain on these from the excess of strike price over stock price.

Summary Introduction

(c)

To detemine:

The observation about the risk for funds doing options and evaluation of performance of such funds.

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

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Answer 3

Question

Chapter 26, Problem 13PS

Summary Introduction

(a)

To calculate:

The average value, the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 .

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Summary Introduction

(b)

To calculate:

The average value and the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 with an extension of one month to include in calculation i.e. October 1987 .

Introduction:

The put options are those type of options in which the expectation is of price fall of that stock. The writer of put options earn gain on these from the excess of strike price over stock price.

Summary Introduction

(c)

To detemine:

The observation about the risk for funds doing options and evaluation of performance of such funds.

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Expert Solution & Answer

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Answer 4

Question

Chapter 26, Problem 13PS

Summary Introduction

(a)

To calculate:

The average value, the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 .

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Summary Introduction

(b)

To calculate:

The average value and the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 with an extension of one month to include in calculation i.e. October 1987 .

Introduction:

The put options are those type of options in which the expectation is of price fall of that stock. The writer of put options earn gain on these from the excess of strike price over stock price.

Summary Introduction

(c)

To detemine:

The observation about the risk for funds doing options and evaluation of performance of such funds.

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Expert Solution & Answer

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Answer 5

Chapter 26, Problem 13PS

Summary Introduction

(a)

To calculate:

The average value, the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 .

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Summary Introduction

(b)

To calculate:

The average value and the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 with an extension of one month to include in calculation i.e. October 1987 .

Introduction:

The put options are those type of options in which the expectation is of price fall of that stock. The writer of put options earn gain on these from the excess of strike price over stock price.

Summary Introduction

(c)

To detemine:

The observation about the risk for funds doing options and evaluation of performance of such funds.

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Answer 6

Chapter 26, Problem 13PS

Summary Introduction

(a)

To calculate:

The average value, the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 .

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Answer 7

Chapter 26, Problem 13PS

Summary Introduction

(a)

To calculate:

The average value, the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 .

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Answer 8

Summary Introduction

(b)

To calculate:

The average value and the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 with an extension of one month to include in calculation i.e. October 1987 .

Introduction:

The put options are those type of options in which the expectation is of price fall of that stock. The writer of put options earn gain on these from the excess of strike price over stock price.

Answer 9

Summary Introduction

(b)

To calculate:

The average value and the standard deviation, and sharpe ratio over the 10-year period i.e. October1977−September 1987 with an extension of one month to include in calculation i.e. October 1987 .

Introduction:

The put options are those type of options in which the expectation is of price fall of that stock. The writer of put options earn gain on these from the excess of strike price over stock price.

Answer 10

Summary Introduction

(c)

To detemine:

The observation about the risk for funds doing options and evaluation of performance of such funds.

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Answer 11

Summary Introduction

(c)

To detemine:

The observation about the risk for funds doing options and evaluation of performance of such funds.

Introduction:

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. In simple terms, it is the return earned in excess of the risk free rate and divided bt standard deviation.

Answer 12

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Answer 23

Ch. 26 - Prob. 1PS Ch. 26 - Prob. 2PS Ch. 26 - Prob. 3PS Ch. 26 - Prob. 4PS Ch. 26 - Prob. 5PS Ch. 26 - Prob. 6PS Ch. 26 - Prob. 7PS Ch. 26 - Prob. 8PS Ch. 26 - Prob. 9PS Ch. 26 - Prob. 10PS

Solution Summary: The author explains the Sharpe ratio, which helps in computing the reward-to-volatility ratio.

Chapter 26 Solutions