# Question: Refer to problem 36 a Suppose you hold an equally

Refer to problem 36.

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 23.1 and 23.2) 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 100 stocks over the next month.

In Problem 36.

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 percent over the coming month.

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 23.1 and 23.2) 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 100 stocks over the next month.

In Problem 36.

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 percent over the coming month.

**View Solution:**## Answer to relevant Questions

Why does it make sense that the first futures markets introduced in nineteenth- century America were for trades in agricultural products? For example, why did we not see instead futures markets for goods such as paper or ...The investment manager of a corporate pension fund has purchased a Treasury bill with 182 days to maturity at a price of $ 9,600 per $ 10,000 face value. The manager has computed the bank discount yield at 8 percent. a. ...A U. S. Treasury bill with 90-day maturity sells at a bank discount yield of 3 percent. a. What is the price of the bill? b. What is the 90-day holding period return of the bill? c. What is the bond equivalent yield of ...An expiring put will be exercised and the stock will be sold if the stock price is below the exercise price. A stop-loss order causes a stock sale when the stock price falls below some limit. Compare and contrast the two ...Go to the Connect site for this book, Chapter 23, and find there a spreadsheet containing monthly values of the S& P 500 index. Suppose that in each month you had written an out- of- the- money put option on one unit of the ...Post your question