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c) (20 points) For the next three questions, consider a passive mutual fund (whose returns are identical with the market), an active mutual fund,
c) (20 points) For the next three questions, consider a passive mutual fund (whose returns are identical with the market), an active mutual fund, and a hedge fund. All returns are given after management fees. passive rt stock market = 8% + Ut stock market + Et = rt ractive = 0.5% +0.8 rstock. The error terms u and are independent over time and of each other, have zero means E[u] = E[et] = 0 and volatilities of var(ut) = 20% and var(t) = 10%. The hedge fund uses the same strategy as the active mutual fund, but implements the strategy as a long-short hedge fund, applying 2 times leverage, generating the following return: rt Hedge fund = 2 (ractive stock market) - i. ii. (5 points) What is the average return of the hedge fund? (7.5 points) What are the hedge fund's alpha and beta? iii. (7.5 points) What is the hedge fund's volatility?
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