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Both approaches have drawbacks, so if one must choose among the two then one shall compare those drawbacks in the specific case. Or another way would be devising a hybrid of the two (e.g. adding statistics of historical deviations of the fund portfolio from the (1) view etc...). Among the drawbacks of (1): trading costs, rebalancings, management fees etc ...

3

In effect, you are wondering whether to price this option on risk-free probability distributions (B-S drift $r_f$), or real-world ones (B-S drift $\mu$, however calibrated) One cannot short the mutual fund, so the argument for using risk-free is weakened. But, there are various economic equilibrium arguments why using it may still be OK. If you use the ...

3

No matter how you calculate the VaR (historical simulation, covariance approach, MC) I assume that you work on historical data or data derived from the history of assets, risk factors and theresuch. If this assumption is correct then I would use approach (1). If you know the exact positions today of the (sub-)funds, then (except from some technicalities) ...

3

Here couple ETFs that may satisfy what you are looking for: http://www.quant-shares.com/etf-list/ http://www.etc.db.com/GBR/ENG/Institutional/Downloads/ISIN/Factsheets/GB00B4N0QN94 http://guggenheiminvestments.com/products/etf/wmcr http://etfdb.com/type/investment-style/high-beta/ Those include ETFs with a momentum approach, mean-reversion approach, ...

1

I believe a nice way to discuss this is to set up a questionnaire which would put them in a situation where they have to make choices between different types of investments (which are abstract) in order to estimate their risk aversion. For example, you ask the people whether they prefer an investment making +10% (80% of the time) and -25% the rest of the ...

1

Is the management fee deducted daily or annually? Or perhaps are you trying to quantify the difference between the two? If annually, are fees in this example deducted based on average daily balance, or ending balance? I think you are also confusing yourself regarding economic vs. accounting cost. Look at how much money is left in the fund after fees ...

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