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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
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 2.3% over the coming month. Beta 0.75 R-square 0.65 Standard Deviation of Residuals 0.12 (i.e., 12% monthly) a-1. If he holds a $4 million portfolio of Waterworks stock, and wishes to hedge market exposure for the next month using 1-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 600 and the contract multiplier is $250. Number of contracts
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