Chapter 26, Problem 15PS

Summary Introduction

(a)

To calculate:

The residual standard deviation of the portfolio where holding is in equally weighted portfolio of $100$ stocks with the same alpha.

Introduction:

Standard deviation: It is historical volatility. It's applied to the annual rate of return to quantify the investment volatility.

Variance: It is the squared of standard deviation. It cannot interpreted easily.

Summary Introduction

(b)

To calculate:

The probability of loss of a return on a market-neutral strategy involving equally weighted on the market-hedged position in the $100$ stocks over the next month.

Introduction:

Standard deviation: It is historical volatility. It's applied to the annual rate of return to quantify the investment volatility.

Variance: It is the squared of standard deviation. It cannot interpreted easily.