(2 points) If the strategy is to have $1,000,000 long of PEP and $1,000,000 short of KO how many shares is the hedge fund going to buy of PEP and how many shares of KO is it going to sell? Do not include any costs in these calculations. (6 points) What percentage outperformance must PEP have over KO in order for the strategy to break even? Include all costs in your analysis. (4 points) Upon further analysis both PEP and KO are expected to pay dividends during the 270 days that the strategy is to be held. Both are expected to pay a $0.50 dividend per share. Does the strategy have a higher or lower probability of making money? Why? The following question deals with financial intermediaries. (2 points) Define financial intermediary. (4 points) Financial markets often suffer from asymmetric information. There are two primary types of asymmetric information – adverse selection and moral hazard. Define these two terms.
(2 points) If the strategy is to have $1,000,000 long of PEP and $1,000,000 short of KO how many shares is the hedge fund going to buy of PEP and how many shares of KO is it going to sell? Do not include any costs in these calculations. (6 points) What percentage outperformance must PEP have over KO in order for the strategy to break even? Include all costs in your analysis. (4 points) Upon further analysis both PEP and KO are expected to pay dividends during the 270 days that the strategy is to be held. Both are expected to pay a $0.50 dividend per share. Does the strategy have a higher or lower probability of making money? Why? The following question deals with financial intermediaries. (2 points) Define financial intermediary. (4 points) Financial markets often suffer from asymmetric information. There are two primary types of asymmetric information – adverse selection and moral hazard. Define these two terms.
FNCE%204070%20%E2%80%93%20Final%20Exam%20-%20version%202.docx