1. Return to the box "International Investing Raises Questions" on page 918. The article was writ¬ten several years ago. Do you agree with its response to the question, "Can U.S. companies with global operations give you international diversification?"
2. Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to invest, and the current exchange rate is $2/£.
a. How many shares can the investor purchase?
b. Fill in the table below for rates of return after 1 year in each of the nine scenarios (three pos-sible prices per share in pounds times three possible exchange rates).
Dollar-Denominated Return
for Year-End Exchange Rate
Pound-Denominated
Price per Share (f) Return (%) $1.80/f $2/f $2.20/f
f35
£40
£45
c. When is the dollar-denominated return equal to the pound-denominated return?
3. If each of the nine outcomes in Problem 3 is equally likely, find the standard deviation of both the pound- and dollar-denominated rates of return.
4. Calculate the contribution to total performance from currency, country, and stock selection for the manager in the example below. All exchange rates are expressed as units of foreign currency that can be purchased with I U.S. dollar.
| |
EAFE Weight |
Return on Equity Index |
E1/E0
|
Manager's Weight |
Manager's Return |
|
Europe
|
0.30
|
20%
|
0.9
|
0.35
|
18%
|
|
Australasia
|
0.10
|
15
|
1.0
|
0.15
|
20
|
|
Far East
|
0.60
|
25
|
1.1
|
0.50
|
20
|
5. You are a U.S. investor who purchased British securities for £2,000 one year on when the British pound cost U.S.$1.50. What is your total return (based on U.S. dollars) if the value of the securities 1 is now £2,400 and the pound is worth $1.75? No dividends or interest were paid during this period.
6. You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the Canadian government bond will be hedged, and the 6-month discount on Canadian dollar forward contracts is -.75% versus the U.S. dollar.
Bond Maturity Coupon Price
U.S. government 6 months 6.50% 100.00
Canadian government 6 months 7.50% 100.00
Calculate the expected price change required in the Canadian government bond that would result in the two bonds having equal total returns in U.S. dollars over a 6-month horizon. Assume that the yield on the U.S. bond is expected to remain unchanged.
7. Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?
8. Which of the following would be the most appropriate benchmark to use for hedge fund evaluation?
a. A multifactor model.
b. The S&P 500.
c. The risk-free rate.
9. A hedge fund with $1 billion of assets charges a management fee of 2% and an incentive tee or 20% of returns over a money market rate, which currently is 5%. Calculate total fees, both in dollars and as a percent of assets under management, for portfolio returns of:
a. -5%
b. 0
c. 5%
d. 10%
10. The following is pan of the computer output from a regression of monthly returns on Wate works stock against the S&P 500 index. A hedge fund manager believes that Waterworks; underpriced, with an alpha of 2% over the coming month.
Standard Deviation
Beta R-square of Residuals
75 .65 .06 (i.e., 6% monthly)
a. If he holds a $2 million portfolio of Waterworks stock, and wishes to hedge market exposure for the next month using 1-month maturity S&P 500 futures contracts, how many contracts should he enter? Should he buy or sell contracts? The S&P 500 currently is at 1,000 and the contract multiplier is $250.
b. What is the standard deviation of the monthly return of the hedged portfolio?
c. Assuming that monthly returns are approximately normally distributed, what is the Pros ability that this market-neutral strategy will lose money over the next month? Assume In risk-free rate is .5% per month.