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Problem 20-17 (Algo) The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index.

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Problem 20-17 (Algo) The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 1% over the coming month. Beta 0.65 R-square 0.65 Standard Deviation of Residuals 8.84 (i.e., 4% monthly) Required: a. Suppose you hold an equally weighted portfolio of 100 stocks with the same alpha, beta, and residual standard deviation as Waterworks. Assume the residual returns (the e terms In Equations 20.1 and 20.2) on each of these stocks are Independent of each other. What is the residual standard deviation of the portfolio? (Round your percentage answer to 2 decimal places.) Residual standard deviation 96 b. Recalculate the probability of a loss on a market-neutral strategy involving equally welghted, market-hedged positions in the 100 stocks over the next month. Assume the risk-free rate is 0.6% per month. (Do not round Intermediate calculations. Round your percentage answer to 5 decimal places.) Probability of a loss %6

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