The following is part of the computer output from a regression of monthly returns on Waterworks...

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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 2.1% over the coming month. Beta 1.4 R- square Standard Deviation of Residuals 0.65 0.1 (i.e., 10% monthly) Now suppose that the manager misestimates the beta of Waterworks stock, believing it to be 0.5 instead of 1.4. The standard deviation of the monthly market rate of return is 9%. If he holds a $5,000,000 portfolio of Waterworks stock. The S&P 500 currently is at 2,000 and the contract multiplier is $50. a. What is the standard deviation of the (now improperly) hedged portfolio? (Round your answer to 3 decimal places.) Standard deviation % b. What is the probability of incurring a loss on improperly hedged portfolio over the next month if the monthly market return has an expected value of 1% and a standard deviation of 9%? The manager holds a $5 million portfolio of Waterworks stock, and wishes to hedge market exposure for the next month using 1-month maturity S&P 500 futures contracts. The S&P 500 currently is at 2,000 and the contract multiplier is $50. Assume the risk-free rate is 0.2% per month. (Enter your answer as percentages and not as a numbers, e.g., enter "12%" and not "0.12".) Probability of a negative return % Che 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 2.1% over the coming month. Beta 1.4 R- square Standard Deviation of Residuals 0.65 0.1 (i.e., 10% monthly) Now suppose that the manager misestimates the beta of Waterworks stock, believing it to be 0.5 instead of 1.4. The standard deviation of the monthly market rate of return is 9%. If he holds a $5,000,000 portfolio of Waterworks stock. The S&P 500 currently is at 2,000 and the contract multiplier is $50. a. What is the standard deviation of the (now improperly) hedged portfolio? (Round your answer to 3 decimal places.) Standard deviation % b. What is the probability of incurring a loss on improperly hedged portfolio over the next month if the monthly market return has an expected value of 1% and a standard deviation of 9%? The manager holds a $5 million portfolio of Waterworks stock, and wishes to hedge market exposure for the next month using 1-month maturity S&P 500 futures contracts. The S&P 500 currently is at 2,000 and the contract multiplier is $50. Assume the risk-free rate is 0.2% per month. (Enter your answer as percentages and not as a numbers, e.g., enter "12%" and not "0.12".) Probability of a negative return % Che

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a To calculate the standard deviation of the improperly hedged portfolio we need to consider the effect of misestimating the beta of Waterworks stock ... View the full answer