Assignment:
Rick Masler is considering the performance of the managers of two funds, the HCM Fund and the GRT Fund.
He uses a linear regression of each manager's excess returns (ri) against the excess returns of a peer group (rB):
ri = ai + bi * rB + ei
The information he compiles is as follows:
|
Fund
|
Initial Equity
|
Borrowed Funds
|
Total Investment Pool
|
ai
|
bi
|
|
HCM
|
USD 100
|
USD 0
|
USD 100
|
0.0150
|
0.9500
|
|
|
|
|
(t = 4.40)
|
(t = 12.1)
|
|
GRT
|
USD 500
|
USD 3,000
|
USD 3,500
|
0.0025
|
3.4500
|
|
|
|
|
(t = 0.002)
|
(t = 10.20)
|
Based on this information, which of the following statements is correct?
a. The regression suggests that both managers have greater skill than the peer group.
b. The ai term measures the extent to which the manager employs greater or lesser amounts of leverage than do his/her peers.
c. If the GRT Fund were to lose 10% in the next period, the return on equity (ROE) would be -60%.
d. The sensitivity of the GRT fund to the benchmark return is much higher than that of the HCM fund.