A financial investor is looking to purchase a new portfolio. Hedge Fund A (HFA) offers a portfolio that is worth an expected £35mil. HFA has analysts who can build a model to boost this portfolio. The boost would add an amount that has a Normal Distribution with mean £3mil and standard deviation £0.5mil. HFA wishes to sell his financial services at a fee that guarantees his expected profit will be 5% of the total value of the portfolio. 1. Calculate the fee of HFA’s financial services. 2. Simulate (with a min of 200 repetitions) the average and the standard deviation of the hedge fund’s profit when setting the fee between 1% and 10% of the total expected value of the portfolio. Then discuss your findings. 3. Now assume the financial investor knows that another hedge fund (HFB) will offer a competitive portfolio. Based on historical data, he knows HFB portfolio’s total value follows a normal distribution with mean £36mil and standard deviation of £2mil and charges a 5% fee. The investor will naturally choose the Hedge Fund offering the portfolio with the highest net return. How does the distribution of HFA’s profit over the range of fees considered in part B changes, when HFB is considered?
A financial investor is looking to purchase a new portfolio. Hedge Fund A (HFA) offers a portfolio that is worth an expected £35mil. HFA has analysts who can build a model to boost this portfolio. The boost would add an amount that has a Normal Distribution with mean £3mil and standard deviation £0.5mil. HFA wishes to sell his financial services at a fee that guarantees his expected profit will be 5% of the total value of the portfolio.
1. Calculate the fee of HFA’s financial services.
2. Simulate (with a min of 200 repetitions) the average and the standard deviation of the hedge fund’s profit when setting the fee between 1% and 10% of the total expected value of the portfolio. Then discuss your findings.
3. Now assume the financial investor knows that another hedge fund (HFB) will offer a competitive portfolio. Based on historical data, he knows HFB portfolio’s total value follows a normal distribution with mean £36mil and standard deviation of £2mil and charges a 5% fee. The investor will naturally choose the Hedge Fund offering the portfolio with the highest net return. How does the distribution of HFA’s profit over the range of fees considered in part B changes, when HFB is considered?
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