1. What is the hedge fund's volatility? (0.5pt)

2. What is the hedge funds beta? (0.5pt)

3. What is the hedge funds alpha before fees (based on the mutual funds alpha estimate)?

Question 5 (Hedge funds vs. mutual funds 4pt ) Consider a passive mutual fund, an active mutual fund, and a hedge fund. The mutual funds claim to deliver the following gross returns: rtpassivefundbeforefees=rtstockindex rtactivefundbeforefees=2.20%+rtstockindex+t The stock index has a volatility of var(rtstockindex)=15%. The active mutual fund has a tracking error with a mean of E(t)=0, a volatility of var(t)=3.5%, and Cov(t,rtstockindex)=0 such that it's beta to the stock index is 1 . The passive fund charges an annual fee of 0.10% and the active mutual fund charges a fee of 1.20%. The hedge fund uses the same strategy as the active mutual fund to identify "good" and "bad" stocks, but implements the strategy as a long-short hedge fund, applying 4 times leverage. The risk-free interest rate is rf=1% and the financing spread is zero (meaning that borrowing and lending rates are equal). Therefore, the hedge fund's return before fees is rthedgefundbeforefees= 1%+4(rtactivefundbeforefeesrtstockindex) 1. What is the hedge fund's volatility? (0.5pt) 2. What is the hedge fund's beta? (0.5pt) 3. What is the hedge fund's alpha before fees (based on the mutual fund's alpha estimate)? (0.5pt) Question 5 (Hedge funds vs. mutual funds 4pt ) Consider a passive mutual fund, an active mutual fund, and a hedge fund. The mutual funds claim to deliver the following gross returns: rtpassivefundbeforefees=rtstockindex rtactivefundbeforefees=2.20%+rtstockindex+t The stock index has a volatility of var(rtstockindex)=15%. The active mutual fund has a tracking error with a mean of E(t)=0, a volatility of var(t)=3.5%, and Cov(t,rtstockindex)=0 such that it's beta to the stock index is 1 . The passive fund charges an annual fee of 0.10% and the active mutual fund charges a fee of 1.20%. The hedge fund uses the same strategy as the active mutual fund to identify "good" and "bad" stocks, but implements the strategy as a long-short hedge fund, applying 4 times leverage. The risk-free interest rate is rf=1% and the financing spread is zero (meaning that borrowing and lending rates are equal). Therefore, the hedge fund's return before fees is rthedgefundbeforefees= 1%+4(rtactivefundbeforefeesrtstockindex) 1. What is the hedge fund's volatility? (0.5pt) 2. What is the hedge fund's beta? (0.5pt) 3. What is the hedge fund's alpha before fees (based on the mutual fund's alpha estimate)? (0.5pt)