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 2.2% over the coming month.

		Standard Deviation
Beta	R-square	of Residuals
1.15	0.65	0.14 (i.e., 14% 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 the residual standard deviation of the portfolio? (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Residual standard deviation

%

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. (risk-free rate is 0.3% per month) (Do not round Z-value in calculations. Enter your answer as percentages and not as a numbers. (Eg: Enter "12%" and not "0.12"). Round your answer to 5 decimal places. Omit the "%" sign in your response.)

Probability of a loss

%

References

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