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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

image text in transcribed 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. 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.) 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 0.2% per month. (Do not round intermediate calculations. Round your percentage answer to 5 decimal places.)

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