Chapter 20, Problem 17C

Return to the previous problem. $\left(\text{LO 2}0-\text{2}\right)$
a. Suppose you hold an equally weighted portfolio of $\text{1}00$ stocks with the same alpha, beta, and residual standard deviation as Waterworks. Assume the residual returns (the e terms in Equations $\text{2}0.\text{1}$ and $\text{2}0.\text{2}$ ) on each of these stocks are independent of each other. What is the residual standard deviation of the portfolio?
b. Recalculate the probability of a loss on a market-neutral strategy involving equally weighted, market-hedged positions in the $\text{1}00$ stocks over the next month.