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Question 1

Multiple Choice

A hedge fund with net capital of USD400 million borrowed an additional USD100 million at an interest rate of 5% per year. The fund's gross return for the year was 13%. What would the return have been if the fund had not used any leverage?

12%

11.2%

13.0%

Explanation

We use the rearranged leverage formula to solve for the unleveraged return:
r = \frac{(V_{t}\times r_{L})-(V_{D}\times r_{D})}{(V_{E}\times V_{D})}V_{T} = 500 = (total capital: 400 +100)
V_{E} = 400
V_{D} = 100
r_{L} = 13%
r_{D} = 5%
r = \frac{(700 \times 0.14) - (200 \times 0.06) }{700}

Rearranged Leverage Formula

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Question 1

A hedge fund with net capital of USD400 million borrowed an additional USD100 million at an interest rate of 5% per year. The fund's gross return for the year was 13%. What would the return have been if the fund had not used any leverage?

Explanation

r = \frac{(V_{t}\times r_{L})-(V_{D}\times r_{D})}{(V_{E}\times V_{D})}

r = \frac{(700 \times 0.14) - (200 \times 0.06) }{700}

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Rearranged Leverage Formula

Question 1

A hedge fund with net capital of USD400 million borrowed an additional USD100 million at an interest rate of 5% per year. The fund's gross return for the year was 13%. What would the return have been if the fund had not used any leverage?

Explanation

r = \frac{(V_{t}\times r_{L})-(V_{D}\times r_{D})}{(V_{E}\times V_{D})}

r = \frac{(700 \times 0.14) - (200 \times 0.06) }{700}

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Full Answer

Rendered Formula: