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Thefollowingispartof thecomputeroutputfromaregressionofmonthlyreturnsofWaterworksstockagainstthe S&P 500indexmonthlyreturns. AhedgefundmanagerbelievesthatWaterworksisunderpriced,withanalphaof 2%overthecomingmonth. Beta R-square Standarddeviation 0.9 0.5 0.055 (i.e. 5.5%monthly) (4points)Ifheholdsa $5millionportfolioofWaterworksstock, andwishestohedgemarketexposurefor thenextmonthusing1-monthmaturityS&P 500futurescontracts,howmanycontractsshouldheenter?Shouldhebuyorsellcontracts? The S&P 500currentlyisat1,200 and thecontractmultiplieris$250. (3points)Whatistheannualisedstandarddeviationof

Thefollowingispartof thecomputeroutputfromaregressionofmonthlyreturnsofWaterworksstockagainstthe S&P 500indexmonthlyreturns. AhedgefundmanagerbelievesthatWaterworksisunderpriced,withanalphaof 2%overthecomingmonth.

Beta

R-square

Standarddeviation

0.9

0.5

0.055 (i.e. 5.5%monthly)

(4points)Ifheholdsa $5millionportfolioofWaterworksstock, andwishestohedgemarketexposurefor thenextmonthusing1-monthmaturityS&P 500futurescontracts,howmanycontractsshouldheenter?Shouldhebuyorsellcontracts? The S&P 500currentlyisat1,200 and thecontractmultiplieris$250.

(3points)Whatistheannualisedstandarddeviationof themonthlyreturnof thehedgedportfolio?

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