The following is part of the computer output from a regression of monthly returns on Waterworks stock
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a. If he holds a $2 million portfolio of Waterworks stock, and wishes to hedge market exposure for the next month using 1-month maturity S&P 500 futures contracts, how many contracts should he enter? Should he buy or sell contracts? The S&P 500 currently is at 1,000 and the contract multiplier is $250.
b. What is the standard deviation of the monthly return of the hedged portfolio?
c. Assuming that monthly returns are approximately normally distributed, what is the probability that this market-neutral strategy will lose money over the next month? Assume the risk-free rate is .5% permonth.
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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a Since the hedge fund manager has a long position in the Waterworks stock he ...View the full answer
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