[2008] Topic 77: Can Hedge-Fund Returns be Replicated? The Linear Case 相关习 following, insurance, perfect, between, similar

wanganjie

 

AIM 1: Explain and distinguish between the strategies followed by “Capital Decimation Partners” and “Capital Multiplication Partners.”

1、The Capital Decimation Partners hypothetical strategy is most similar to which of the following?

A) Buying insurance.

B) Selling insurance.

C) A perfect market-timing strategy.

D) A protective put option strategy.

wanganjie

 

The correct answer is B

Capital Decimation Partners, CDP, strategy of writing out-of-the money puts is most similar to selling insurance. A perfect market-timing strategy is consistent with the CMP strategy. The CMP strategy is a protective put strategy that involves a long position a put option on the underlying asset, and the underlying asset (S& 500), which is the same as buying insurance.

wanganjie

 

2、The Capital Multiplication Partners hypothetical strategy is least similar to which of the following:

A) Buying insurance.

B) Selling insurance.

C) A perfect market-timing strategy.

D) A dynamic asset allocation strategy.

wanganjie

 

The correct answer is B

Capital Multiplication Partners, CMP, is a hypothetical perfect market strategy that is also a dynamic asset-allocation strategy. The CMP strategy has been proven to be the same as holding a long position in the S& 500 and a put option on the S& 500 with the strike price equal to the Treasury bill rate. Buying a put when owning the underlying asset is equivalent to buying insurance. The CDP strategy of writing out-of-the money puts is the most similar with selling insurance.

wanganjie

 

3、Which of the following is a perfect market-timing strategy?

I.           Capital Decimation Partners.

II.         Capital Multiplication Partners.

A) I only.

B) Both I and II.

C) Neither I nor II.

D) II only.

wanganjie

 

The correct answer is D

Capital Multiplication Partners, CMP, is a hypothetical perfect market strategy of always investing in the asset that generates the highest return each month.

wanganjie

 

4、Which of the following best describes the Capital Multiplication Partners strategy?

A) Writing out-of-the-money puts.

B) A covered call strategy.

C) A perfect market-timing strategy.

D) Selling insurance.

wanganjie

 

The correct answer is C

A perfect market-timing strategy is consistent with the CMP strategy. The CMP strategy is a protective put strategy that involves a long position, a put option on the underlying asset, and the underlying asset (S& 500), which is the same as buying insurance.

wanganjie

 

AIM 2: Compare the relative performance of various hedge fund strategies.

1、The Sharpe ratio for hedge funds is overstated:

A) if the standard deviation of the hedge fund is overstated.

B) during periods when the risk-free rate is low.

C) if the hedge fund is liquid.

D) if a hedge fund returns have high positive serial correlation.

wanganjie

 

The correct answer is D

High values of positive autocorrelation is an indication of illiquidity exposure, which would create low values for the standard deviation and therefore overstate the Sharpe ratio.