Calculate the average rolling returns for the hedge fund if the investor’s investment horizon is nine months. Answer: RR9,1=(2.7+1.7−1+0.9−1−2−2+4+3.5)/9=0.7556% RR9,2=0.7778% RR9,3=0.3778% RR9,4=0.2444% Average=(0.7556+0.7778+0.3778+0.2444)/4=0.54% Q: 1. Why RR9.2~9,4 are here? 2. Why use 4 periods to do the average? Thanks.
This is how I solve these types of questions:
I believe the question has given you a total of 12 monthly returns correct?
Try to understand the basic idea here: the investor wants to know what the average return is if they hold an asset for 9 months during the year. But you can hold it for 9 months starting in Jan, or in Feb, or in March or in April (4 variations) right?
So:
Jan (1) to Sep (9) is the first 9 month period that you can get a 9 month return
Feb (2) to Oct (10) is the second 9 month period that you can also get a 9 month return
Mar (3) to Nov (11) is the third 9 month period that you can also get a 9 month return
Apr (4) to Dec (12) is the fourth and last 9 month period that you can also get a 9 month return.
Calculate the return for each variation and then average the four of them.
If the question was for a 3 month horizon of rolling returns, there are many more variations of getting a 3 month return so you would use:
Jan to Mar
Feb to Apr
Mar to May
Apr to Jun
May to Jul
Jun to Aug
Jul to Sep
Aug to Oct
Sep to Nov
Oct to Dec
So just think to yourself how many variations of the investment horizon can I have in the given period of data. Then calculate each period, add them and divide by the number of variations.
Many thanks Arigolden! It’s helpful.
Thank you so much arigolden , i wasted a huge amount of time on this question!. You solved the mystery !
R24 in 2016