Hedge Fund Assignment

A hedge fund called XYZ has the following monthly performance numbers:



Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007 2.0% 0.2% 4.0% -2.3% 5.0% 0.6% 3.0% -0.7% -0.1% 2.5% 0.3% 4.0%
2008 3.1% 0.8% -3.6% 2.2% 2.0% 0.0% 0.2% 1.0% -7.0% -6.2% 3.0% 0.0%
2009 -2.5% -2.5% 6.0% 3.4% 0.0% 8.0% -1.4% -0.3% 5.0% 0.0% -0.4% 4.0%

The hedge fund manager calculates the following statistics for XYZ and the stock market MKT:

Monthly Annualized
average(total return of XYZ) 0.95% 11.43%
average riskfree return 0.18% 2.16%
std(return XYZ) 3.15% 10.92%
average(total return MKT) -0.19% -2.31%

r-rf = alpha + beta * (MKT – rf) + epsilon

alpha of XYZ 0.87% 10.45%
beta 0.25
std(epsilon) 2.74% 9.48%

Using geometric returns, what is the maximum drawdown of XYZ?

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