Question

In: Finance

2. Logic fund is performing well and has decided to begin reporting its performance to various...

2. Logic fund is performing well and has decided to begin reporting its performance to various hedge fund databases. This is an example of what potential type of data risk?

A. Liquidation bias

B. Survivorship bias

C. Selection bias

D. Event bias

3. What Drives Commodity Futures Returns?

A. The rule of thumb is that Excess Returns are driven by Inflation since commodities are an inflation hedge.

B. Interest Rates and Exchange Rates

C. The roll return “explains” 52% of the cross-section of futures returns, while the spot return “explains” “only” 92% of the cross-section of futures returns. Thus, spot returns drive the expected future excess returns.

D. The roll return “explains” 92% of the cross-section of futures returns, while the spot return “explains” “only” 52% of the cross-section of futures returns. Thus, roll returns drive the expected future excess returns.

Solutions

Expert Solution

Answer-  

Q 2)

The correct Option is B. Survivorship bias.

The Survivorship bias is a type of selection bias where the results of data or stock or fund of a particular outcome are disproportionately evaluated over others because of good performance.

The other Options A, C and D are incorrect.

Option A is incorrect. Liquidation bias occurs when fund managers of funds which do not perform well stop reporting returns to databases before the liquidation of the fund is done.
Option C is incorrect as Selection bias occurs when managers use improper procedures for selecting a sample population.
Event bias occurs when the occurrence of a particular event is required for inclusion in specific study.

Q 3)

The correct Option is D. The commodity returns are driven by roll returns.

The roll return “explains” 92% of the cross-section of futures returns, while the spot return “explains” “only” 52% of the cross-section of futures returns

Erb and Harvey (2006) found that roll return explains 92% of the cross-sectional variance in the performance of different commodity futures investments over a single 21-year horizon.

The other Options A,B and C are incorrect.

Option A is incorrect as inflation does not drives commodity prices but investment in commodities is used as a hedge for rise in inflation.
Option B is incorrect. Interest rates and Exchange rates do not drive Commodity prices but fall in stock prices might prompt investors to buy commodities such as gold and silver.
Option C is incorrect. The roll return “explains” 52% of the cross-section of futures returns is incorrect as per the Erb and Harvey study.


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