Problem 20-17 (Algo)The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. Ahedge fund manager believes that Waterworks is underpriced, with an alpha of 1% over the coming month.Beta0.60R-square0.65Required:a. Suppose you hold an equally weighted portfolio of 100 stocks with the same alpha, beta, and residual standard deviation asWaterworks. Assume the residual returns (the e terms in Equations 20.1 and 20.2) on each of these stocks are independent of eachother. What is the residual standard deviation of the portfolio? (Round your percentage answer to 2 decimal places.)Residual standard deviationStandard Deviationof Residuals0.06 (1.e., 6% monthly)Probability of a lossb. Recalculate the probability of a loss on a market-neutral strategy involving equally weighted, market-hedged positions in the 100stocks over the next month. Assume the risk-free rate is 1.3% per month. (Do not round intermediate calculations. Round yourpercentage answer to 5 decimal places.)%%

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Description: Problem 20-17 (Algo)The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. Ahedge fund manager believes that Waterworks is underpriced, with an alpha of 1% over the coming mon

R square0.65Beta0.60Monthly standard deviation6%Number of stocks100Alpha1%Monthly risk-free…

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Problem 20-17 (Algo) 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 1% over the coming month. Beta 0.60 R-square 0.65 Standard Deviation of Residuals 0.06 (1.e., 6% monthly)

Problem 20-17 (Algo) 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 1% over the coming month. Beta 0.60 R-square 0.65 Standard Deviation of Residuals 0.06 (1.e., 6% monthly)

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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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. Beta 0.60 R-square 0.65 Standard Deviation of Residuals 0.07 (1.e., 78 monthly) 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 201 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 0.9% per month. (Do not round intermediate calculations. Round your percentage answer…
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