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Anne Thornton invests $200 million in a hedge fund that is committed to finding alpha among small-cap stocks. The hedge funds alpha performance is remarkable,
- Anne Thornton invests $200 million in a hedge fund that is committed to finding alpha among small-cap stocks. The hedge funds alpha performance is remarkable, earning 1.5% per annum over the last eight years with a beta sensitivity of 0.8 to the Russell 2000, an index of small-cap stocks. However, she does NOT want to be exposed to the beta of the Russell 2000. Instead, she wants $120 million of notational exposure to the S&P 500 index and $80 million of notional exposure to the S&P U.S. Treasury Bond index. So, she shorts the appropriate number of Russell 2000 futures contracts and ports the alpha from the hedge fund to long positions in 1) S&P 500 futures contracts that have a notional value of $120 million and 2) S&P U.S. Treasury Bond futures contracts that have a notional value of $80 million. She estimates that the S&P 500 index will earn 10% this next year and the S&P U.S. Treasury Bond index will earn 5%. For simplicity, assume that there are no other costs or fees to consider. What is the total dollar return that Ms. Thornton expects to earn on her portfolio?
- $12 million.
- $4 million.
- $3 million.
- $19 million.
None of the above.
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