Problem
A stock has generated a return of 15% over the past year. A hedge fund has bought the stock during this period, but financed this acquisition "on margin"; that is, the fund invested only 50% of its own capital in the stock and borrowed the remaining investment at a 2% interest rate.
1. What is the return realized by the hedge fund on its own capital?
2. The volatility of the stock is 20%. What is the volatility of the hedge fund's levered position from the previous question?