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 twin-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 statements are likely to be true? Choose all that apply. (Multiple answer question. Do not select all choices as some may have negative score). A. The strategy is risk-free. B. The strategy earns high returns because it is exposed to equity market risk. C. The strategy is more volatile compared to an investment in the stock market (say the S&P 500). D. The strategy does not have any systematic risk, it is only exposed to firm-specific (or idiosyncratic) risk.

In the following exercise, separate the investments according to the type of Keynesian demand they are: Transactions (0% to 5%), Precautionary (6% to 9%), and Speculative demand (greater than 10%). Investment in each category has the same risk. So you want to invest in the highest return for the same risk. Take each demand type and choose the highest return and put that amount into the investment. For example, if Bond fund A has a return of 4% and Fund B has a return of 5%, they have the same risk, so you would put $70 into bond fund B.       You have the following investments Opportunities ad returns. Fidelity Bonds                                       11% Fidelity Magellan                                    9% Putman Bonds one                                4% Putman bonds Two                            12% Growth Stock One                               15% Growth and Income                             8% Income Fund                                           3% Putman Growth…

An analyst develops the following covariance matrix of returns: Hedge Fund Hedge Fund Market Index 0.0289 0.00765 Market Index 0.00765 0.0225 Calculate the correlation of returns between the hedge fund and the market index.

If markets are efficient then: All stocks will have the same expected returns All stocks will have the same risk Two stocks will the same volatility will have the same expected returns Two stocks with the same priced risks will have the same expected returns