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A fund manager

1. Do Chapter 4 Problem 24 in BKM (P114)

2. Do Chapter 4 Problem 25 in BKM (P115)

3. [Modified BKM Question] Suppose that every time a fund manager trades stock, trans-
action costs such as commissions, bid-asked spreads, and price impact amount to 0:4% of the
value of the trade. If the portfolio turnover rate is 400% per year, by how much is the annual
total return of the portfolio reduced by trading costs?

4. Do Chapter 26 Problem 2 (P902)

5. [Modified BKM Question] True or False. Briefly explain your answers.
a) Because hedge funds often use market neutral strategies (e.g. pairs trading), the risk-free
rate is the best benchmark to use for hedge fund evaluation.
b) Statistical arbitrage always generates a positive trading pro.t.
c) The publicly available data for the analysis of the performance of the average mutual
fund is superior to the publicly available data for the analysis of the performance of the average
hedge fund.

6. Fidelity Magellan Versus Vanguard 500 Index
a) Download the file assignment7data.xls
b) Estimate the historical performance of each fund relative to the 1-factor and 3-factor
models using regressions and include the regression results, but not the original data, in your
homework submission.
c) Based on your results from part b) and any other related considerations, which of these
two mutual funds would you purchase? Briefly explain your answer.