What is the expected return for the hedge fund in case of the investment with a 0

Finance Nov 03, 2020

What is the expected return for the hedge fund in case of the investment with a 0.4 probability of a 50% return and a 0.6 probability of a -50% return, with the fees being 2 plus 20%

Expert Solution

P1=0.4

P2 = 0.6

R1= 50 %

R2 = -50 %

Expected Return before fee = (P1 *R1) + (P2 *R2) +

= (0.4 *0.5) + (0.6 * -0.5)

= 0.20 - 0.30

= -0.10 or negative 10%

Only assets management fee will applicable in case of loss on hedge fund

Expected Return after fee = Expected return + 2% fee

= 12% negative

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