Question 1 (20 marks)

1. You are given the following information in the table below for security A, B and C. The market portfolio has a standard deviation of return at 18%.

Security i	i	E(Ri)	(ei)
A	0.9	6%	22%
B	0.6	7%	8.5%
C	1.7	9%	18%

Calculate the systematic risk for security A, B and C respectively. (3 marks)

Interpret the e_i and (e_i) (2 marks)

Which security has the highest Treynor ratio? (2 marks)

b. You are given the following information for a hedge fund with high watermark requirement and a fee structure of 1 and 20. Based on the available information, please complete the following parts.

1. Calculate the return for each year and also decide the high watermark;
2. Calculate the management fee in dollars, assume it is 1%;
3. Calculate the incentive fee net of management fee in dollars;
4. Lastly calculate the net returns to the investors.

(13 marks)

	Year 1	Year 2	Year 3	Year 4
Initial Value	300,000	285,000	325,000	290,000
Ending Value	285,000	325,000	290,000	322,000
Return
High Watermark
Hurdle rate	10%	10%	10%	10%
Management fee ($)
Incentive fee net of management fee ($)
Net returns to investors