eta R-square 0.65 of Re 0.05 (1.e., 5e monthly) -62 ired: ppose you hold an equally weighted portfolio of 100 stocks with the same alpha, beta, and residual standard erworks. Assume the residual returns (the e terms in Equations 20.1 and 20.2) on each of these stocks are inde T. What is the residual standard deviation of the portfolio? (Round your percentage answer to 2 decimal plac dual standard deviation % ecalculate the probability of a loss on a market-neutral strategy involving equally weighted, market-hedged Ks over the next month. Assume the risk-free rate is 0.1% per month. (Do not round intermediate calculatio entage answer to 5 decimal places.)

eta R-square 0.65 of Re 0.05 (1.e., 5e monthly) -62 ired: ppose you hold an equally weighted portfolio of 100 stocks with the same alpha, beta, and residual standard erworks. Assume the residual returns (the e terms in Equations 20.1 and 20.2) on each of these stocks are inde T. What is the residual standard deviation of the portfolio? (Round your percentage answer to 2 decimal plac dual standard deviation % ecalculate the probability of a loss on a market-neutral strategy involving equally weighted, market-hedged Ks over the next month. Assume the risk-free rate is 0.1% per month. (Do not round intermediate calculatio entage answer to 5 decimal places.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 17P

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Question

100%

22
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% over the coming month.
Standard Deviation
of Residuals
0.05 (i.e., 58 monthly)
Beta
R-square
0.65
0.62
X 01:57:28
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.)
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 0.1% per month, (Do not round intermediate calculations. Round your
percentage answer to 5 decimal places.)
%
Probability of a loss

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