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 1% over the coming month.

Standard Deviation
Beta R-square of Residuals
.70 .65 .05 (i.e., 5% 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 (theeterms 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 answer to 2 decimal places.)

Residual standard deviation %

b.

Recalculate 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 .9% per month.

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

Step: 3

blur-text-image

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

Entrepreneurial Finance

Authors: J. Chris Leach, Ronald W. Melicher

2nd Edition

0324289235, 9780324289237

More Books

Students also viewed these Finance questions

Question

=+b) Find the predicted value for the year 2012. Is it realistic?

Answered: 1 week ago

Question

List the four main concerns of bank asset management.

Answered: 1 week ago

Question

6. How can a message directly influence the interpreter?

Answered: 1 week ago