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17 January, 07:10

Suppose a hedge fund manager earns 1% per trading day. There are 250 trading days per year. Answer the following questions: (a) What will be your annual return on $100 invested in her fund if she allows you to reinvest in her fund the 1% you earn each day?

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  1. 17 January, 09:35
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    Annual Interest will be $1,103.21

    Explanation:

    Reinvesting on 1% per working will enable a fund manager to compound the earning to 250 trading days per year.

    Use following formula to calculate the the amount investment after compounding 250 days.

    F = P (1 + r/n) ^n

    n is the number of period in a year. and r/n is the interest per day which 1%.

    F = 100 (1 + 0.01) ^250

    F = $1,203.22

    Return = $1,203.22 - $100 = $1,103.21

    Another way:

    Effective Annual rate = (1 + 0.01) ^250 - 1

    Effective Annual rate = (1.01) ^250 - 1

    Effective Annual rate = 11.0321 = 1,103.21%

    F = 100 x 1103.21% = $1103.21
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