Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 2.5% over the coming month.

Beta R-square Standard Deviationof Residuals

1 0.65 0.11 (i.e., 11% monthly)

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 on each of these stocks are independent of each other. What is theresidual standard deviation of the portfolio?(Round your answer to 1 decimal place.)

b.Calculate the probability of a loss on a market-neutral strategy involving equally weighted, market-hedged positions in the 100 stocks over the next month. Assume the risk-free rate is 0.5% per month.(Do not round intermediate calculations. Enter your answer as percent rounded to 5 decimal places.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials of Managerial Finance

Authors: Scott Besley, Eugene F. Brigham

14th edition

324422709, 324422702, 978-0324422702

More Books

Students also viewed these Finance questions

Question

1. Understand the place of planning in HRM.

Answered: 1 week ago