Index funds are mutual funds that try to mimic the movement of leading market indexes. Company Y is a leading provider of leveraged index funds, which are designed to magnify the movement of major indexes. Complete (a) through (d) below. Click the icon to view information about index funds. Click the icon to view information about company Y's leveraged index funds. ... a. Company Y has a third leveraged fund, the Large Cap Bull 4x fund, GHK, is 400% of the performance of Index 3. Compute the values of Bo and B, that form the approximate market model for GHK below. (% weekly change in GHK) = bo+b1(% weekly change in Index 3) bo = 0 and b1 = 4 (Type integers or decimals.) b. If Index 3 gains 20% in a certain year, what return would GHK be expected to have? Select the correct choice below and fill in the answer box to complete your choice. A. If Index 3 gains 20% in a year, GHK is expected to gain an estimated 80 %. OB. If Index 3 gains 20% in a year, GHK is expected to lose an estimated %. c. If Index 3 loses 40% in a certain year, what return would GHK be expected to have? Select the correct choice below and fill in the answer box to complete your choice. A. If Index 3 loses 40% in a year, GHK is expected to gain an estimated %. B. If Index 3 loses 40% in a year, GHK is expected to lose an estimated %. Index funds The volatility of a stock is often measured by its beta value. The beta value can be estimated by developing a simple linear regression model, using the percentage weekly change in the stock as the dependent variable and the percentage weekly change in a market index as the independent variable. For example, if you wanted to estimate the beta for some company X, you could use the following model, which is sometimes referred to as a market model. (% weekly change in company X stock) = Bo + B1(% weekly change in the major index) = The least-squares regression estimate of the slope by is the estimate of the beta value for company X. Because index funds try to mimic the movement of leading indexes, the beta values for these index funds are approximately 1.0, and the estimated market models for these funds are approximated by the equation shown below. (% weekly change in index fund) = 0.0 + 1.0(% weekly change in the major index) - Company y's leveraged index funds Two of company Y's leveraged index funds are shown in the table below. Ticker Symbol Description ABC 300% of Index 1 Name Daily Small Cap 3x Fund Daily Large Bull 2x Fund DEF 200% of Index 2 The estimated market models for these funds are approximated by the equations shown below. (% weekly change in ABC) = 0.0 +3.0(% weekly change in Index 1) (% weekly change in DEF) = 0.0+ 2.0(% weekly change in Index 2) Thus, if Index 1 gains 10% over a period of time, the leveraged mutual fund ABC gains approximately 30%. On the downside, if the same index loses 20%, ABC loses approximately 60%
