ECOMO57 (2020) Page 3 B Question 2 With respect to the performance of two hedge funds (A and B) over a certain period of time, the following information in Table 2 was obtained. The risk-free interest rate is 2% Table 2 Hedge Fund A Average Return Beta 1.05 Standard Deviation Returns 26% 18% a) Compute the Sharpe ratio of funds A and B (present your results rounded to two decimal places: for example 1.045 as 1.05). Explain your answer. [5 marks) 12% 8% 1.35 b) Using this performance measure, which fund performs better? Explain your answer by providing a brief interpretation of the information the Sharpe ratio is giving you. [5 marks) For both funds, consider the additional information about trading costs (measured as a percentage of assets under management, and the effective tax expenses in Table 3. Table 3 A B Hedge Fund Effective Tax Expenses (%) 25 15 Trading Costs (%) 4.5 1.8 c) Compute the adjusted returns of both funds, after considering the trading costs and the tax costs. Explain your answer (present results rounded to one decimal place). [10 marks] d) Recalculate the Sharpe ratios of both funds using the adjusted retums obtained from Question 2c. Does your conclusion from Question 2b change? Explain your answer (present results rounded to two decimal places). [5 marks) ECOMO57 (2020) Page 3 B Question 2 With respect to the performance of two hedge funds (A and B) over a certain period of time, the following information in Table 2 was obtained. The risk-free interest rate is 2% Table 2 Hedge Fund A Average Return Beta 1.05 Standard Deviation Returns 26% 18% a) Compute the Sharpe ratio of funds A and B (present your results rounded to two decimal places: for example 1.045 as 1.05). Explain your answer. [5 marks) 12% 8% 1.35 b) Using this performance measure, which fund performs better? Explain your answer by providing a brief interpretation of the information the Sharpe ratio is giving you. [5 marks) For both funds, consider the additional information about trading costs (measured as a percentage of assets under management, and the effective tax expenses in Table 3. Table 3 A B Hedge Fund Effective Tax Expenses (%) 25 15 Trading Costs (%) 4.5 1.8 c) Compute the adjusted returns of both funds, after considering the trading costs and the tax costs. Explain your answer (present results rounded to one decimal place). [10 marks] d) Recalculate the Sharpe ratios of both funds using the adjusted retums obtained from Question 2c. Does your conclusion from Question 2b change? Explain your answer (present results rounded to two decimal places). [5 marks)