QUESTION 22

Institutional Investormagazine put "The Great Hedge Fund Experiment" on the cover of its June 2011 issue. Inside, the magazine described how in little over a decade, state pension funds had gone fromconsidering hedge funds as "too risky and secretive" to embracing them in their asset allocation schemes.The magazine argued the interchange had left both pension funds and hedge funds profoundly changed.

The Florida State Board of Administration (SBA) (which managed the Florida Retirement System, one of the country's largest state pensions), had been slow to consider hedge funds, not gaining statutory authority to invest in them until 2007.Since then the Florida Legislature had increased the statutory limit and by 2015, the SBA could put up to 20 percent of the FRS's assets into hedge funds and other alternative investments. The SBA maintained a flexible asset allocation scheme, investing in hedge funds not as an asset class but to opportunistically capture attractive opportunities or improve the FRS's portfolio efficiency through diversification. In 2015, the SBAinvested nearly seven percent of the FRS's funds in strategic investments.

For Florida and other state pension systems, any allocation to hedge funds remained controversial, especially after the California Public Employees' Retirement System (CalPERS) decided to close its hedge fund program in 2014. CalPERS's decision reverberated throughout the industry - theNew York Timesdescribed it as a watershed moment for the hedge fund industry - not only because the pension fund was the nation's largest, but also because CalPERS had actually been one of the first state pension funds to invest in hedge funds in 2002.However in 2014, CalPERS threw in the towel, arguing that hedge funds were too expensive, opaque, and complicated for its money managers. Many analysts agreed.

Nonetheless, many state funds believed that hedge funds could be part of the mix to gain attractive investment returns.In 2015, most state pension funds in the United States were severely underfunded, having taken massive hits during the Great Recession of 2008. Lawmakers who had legal obligations for paying these defined benefit plans faced a number of unattractive options. They could raise taxes to increase funding, never a popular stance for a politician. Or they could try to decrease current benefits, an action of questionable legal merit in many jurisdictions, and face litigation and the ire of public employees and their sometimes powerful unions. (Legislatures have clear legal authority to change benefits prospectively, but this provides no immediate remedy for underfunding issues relating to prior and or current benefits. ) Or they could attempt to grow the pension fund assets through investments, such as hedge funds.

1. Assume (, ) = 4()0.5 + 10. What is the Bordering Rate of Replacement of y for x when x=2 and y=4?

2. Justify the statement The government puts a price ceiling on the cost of a large pizza. Consumers will loose from this policy.

3. All goods, normal or inferior, satisfy the Law of Demand discuss the question if it is true or false.

4. Rahul and Juan are the only consumers in the market for root beer in a small town in Nova Scotia. Their demand curves are given by P=30-2Qi and P=60-2Qj, where Qi and Qj are the quantities demanded by Rahul and Juan, respectively. What is the market demand curve for root beer in their town?

5. Nadia likes pork Ribs (R) and Chicken wings (C). Her utility function is (, ) = 102. Her weekly income is $90 which she spends exclusively on R and C. The price for a slab of ribs is $10 and $5 for a piece chicken. (Answer parts a to f).

a. State in words and in math Nadia's consumer problem

(b) What is Nadia's optimal bundle?

(c) What is her demand function for ribs?

(d) Are ribs a normal or inferior good?

6.The price of ribs falls to 5$. Draw the income and substitution effects of this price change graphically. Assume ribs are on the horizontal axis.

7. What would Nadia's optimal bundle be if her utility function was given by = + ? Assume the price for a slab of ribs is $10 and $5 for chicken