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 0.75 R-square 0.65 Standard Deviation of Residuals 0.06 (1.e., 6 monthly) 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.) Answer is complete and correct. 0.6 Residual standard deviation 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.) Answer is complete but not entirely correct. Probability of a loss 2.00000%
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 0.75 R-square 0.65 Standard Deviation of Residuals 0.06 (1.e., 6 monthly) 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.) Answer is complete and correct. 0.6 Residual standard deviation 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.) Answer is complete but not entirely correct. Probability of a loss 2.00000%
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter8: Time Series Analysis And_forecasting
Section: Chapter Questions
Problem 16P: The following table reports the percentage of stocks in a portfolio for nine quarters: a. Construct...
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