A convertible bond (CB) arbitrage hedge fund manager buys 20 convertible bonds with a PAR Value of $1,000 paying an annual coupon of 3.5%. The CB purchase price was $960 per bond. Each CB is convertible into 10 shares of common stock at $25 per share which is also the current share price. The hedge fund manager has determined that the appropriate hedge ratio is 0.70. The short rebate is 2.5% and borrowing cost is 4.0%. The stock pays an annual dividend of $1 per share.

If the manager has entered into the position with a 2-to-1 leverage ratio (i.e., borrow 50% of the capital) and after one year, the price of the bonds jumps to $990 with the stock price at $27, calculate the managers return on investment. (23 Marks)