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 2.5% over the coming month. Beta 1 R-square 0.65 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.) Residual standard deviation Standard Deviation of Residuals 0.11 (i.e., 11% monthly) Probability of a loss 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. Assume the risk-free rate is 0.5% per month. (Do not round intermediate calculations. Enter your ans as percent rounded to 5 decimal places.) answe % %
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 2.5% over the coming month. Beta 1 R-square 0.65 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.) Residual standard deviation Standard Deviation of Residuals 0.11 (i.e., 11% monthly) Probability of a loss 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. Assume the risk-free rate is 0.5% per month. (Do not round intermediate calculations. Enter your ans as percent rounded to 5 decimal places.) answe % %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Ee 259.
Transcribed Image Text: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 2.5% over the coming month.
Beta
1
R-square
0.65
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.)
Residual standard deviation
Standard Deviation
of Residuals
0.11 (i.e., 11% monthly)
Probability of a loss
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. Assume the risk-free rate is 0.5% per month. (Do not round intermediate calculations. Enter your answer
as percent rounded to 5 decimal places.)
%
%
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