Return to the previous problem.
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 (1) and (2) on each of these stocks are independent of each other. What is the residual standard deviation of the portfolio?
(1)..... rportfoilo = rf +β(rM - rf) + e +α
(2) ..... Hedged proceeds = $1, 236,000 + $1,200,000 × e
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.