9.pdf 2/7 | 100% + 1. (30 points) The following table presents sample data for Reformation Capital (RC), a hedge fund. (Abstract from potential biases in the data.) Month 1 Month 2 Month 3 Return for RC 1.20% -0.5% 1.7% Risk-free return 0.20% 0.1% 0.15% Total market return 1.10% -0.7% 2.0% Table 1: Data for RC Hedge Fund (a) Calculate quarterly arithmetic and geometric average returns for RC. (b) Calculate and interpret the quarterly Sharpe Ratio for RC. (c) Suppose Month 1 was the first month of trading for RC. Calculate the high water mark and drawdown of RC for each month. Discuss how a hedge fund manager i might use drawdown as part of their risk management strategy. (d) Suppose RC generates a positive return for its investors over time. You regress RC's excess returns on the excess returns of the market portfolio and find 3-0. Does that necessarily mean that traders at RC are skilled at generating a for investors? How you might augment the regression above to uncover the sources of RC's a? Discuss. 2. Suppose you have data on today's stock returns of 500 publicly-traded firms. You sort the data on returns based on yesterday's values of book-to-market (BM) ratios and size (SZ). The following table summarizes your findings Small SZ Large SZ Low BM 3% 9% High BM 13% 17% Table 2: Mean returns by sorting variable 9.pdf 2/7 | 100% + 1. (30 points) The following table presents sample data for Reformation Capital (RC), a hedge fund. (Abstract from potential biases in the data.) Month 1 Month 2 Month 3 Return for RC 1.20% -0.5% 1.7% Risk-free return 0.20% 0.1% 0.15% Total market return 1.10% -0.7% 2.0% Table 1: Data for RC Hedge Fund (a) Calculate quarterly arithmetic and geometric average returns for RC. (b) Calculate and interpret the quarterly Sharpe Ratio for RC. (c) Suppose Month 1 was the first month of trading for RC. Calculate the high water mark and drawdown of RC for each month. Discuss how a hedge fund manager i might use drawdown as part of their risk management strategy. (d) Suppose RC generates a positive return for its investors over time. You regress RC's excess returns on the excess returns of the market portfolio and find 3-0. Does that necessarily mean that traders at RC are skilled at generating a for investors? How you might augment the regression above to uncover the sources of RC's a? Discuss. 2. Suppose you have data on today's stock returns of 500 publicly-traded firms. You sort the data on returns based on yesterday's values of book-to-market (BM) ratios and size (SZ). The following table summarizes your findings Small SZ Large SZ Low BM 3% 9% High BM 13% 17% Table 2: Mean returns by sorting variable
