Question #32

Reading: Reading 34 Hedge Fund Strategies

PDF File: Reading 34 Hedge Fund Strategies.pdf

Page: 13

Status: Incorrect

Correct Answer: A

Your Answer: B

Part of Context Group: Q32-34 First in Group
Shared Context
- In order to establish a beta-neutral pairs trade, relative to the number of shares bought in the long position in HOM, Shore should short sell: A) the same number of shares in SAR. B) double the number of shares in SAR. C) half the number of shares in SAR.
Question
The increase in soft-catalyst trades by the merger arbitrage team will be expected to:
Answer Choices:
A. increase the return and decrease the risk of the team
B. decrease both the risk and return of the team
C. increase both the risk and return of the team
Explanation
Under a soft-catalyst approach, investments are made based on expected announcements of mergers. Under a hard-catalyst approach, investments are made based on merger announcements that have already been made. Because the soft-catalyst approach involves the extra uncertainty of deals being announced, profits from this approach are expected to be more volatile. However, because they would profit from the large share price movements when deals are announced, there would be higher expected returns.
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