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 Required: a-1. If he holds a $8.0 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 2,000 and the contract multiplier is $50. Number of contracts Standard Deviation of Residuals 0.07 (1.e., 7% monthly) O Buy O Sell a-2. Should he buy or sell contracts? b. 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 0.7% per month. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.) Probability

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 Required: a-1. If he holds a $8.0 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 2,000 and the contract multiplier is $50. Number of contracts Standard Deviation of Residuals 0.07 (1.e., 7% monthly) O Buy O Sell a-2. Should he buy or sell contracts? b. 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 0.7% per month. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.) Probability

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter6: Risk And Return

Section: Chapter Questions

Problem 4P: An analyst gathered daily stock returns for Feburary 1 through March 31, calculated the Fama-French...

See similar textbooks

Similar questions

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 1% over the coming month. Beta R-square Standard Deviationof Residuals 0.75 0.65 0.05 (i.e., 5% monthly) Required: a-1. If he holds a $12.0 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 2,000 and the contract multiplier is $50. a-2. Should he buy or sell contracts?multiple choice Sell Correct Buy b. 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 0.8% per month. (Do not round intermediate calculations. Round your percentage answer to 2…
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 1.1 R-square 0.65 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.) Residual standard deviation Standard Deviation of Residuals 0.13 (1.e., 13% monthly) Probability of a loss 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 0.3% per month. (Do not round intermediate calculations. Enter your answer as percent rounded to 5 decimal places.) % %
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 Standard Deviation R- of Residuals square 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…
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 2.3% over the coming month. Beta 1.5 Standard Deviation of Residuals R- square 0.65 0.12 (i.e., 12% monthly) Now suppose that the manager misestimates the beta of Waterworks stock, believing it to be 0.5 instead of 1.5. The standard deviation of the monthly market rate of return is 11%. If he holds a $4,000,000 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 11% ? The manager holds a $4 million portfolio of…
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 1.65 R-square 0.65 standard Deviation of Residuals .15 (i.e., 15% 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.) 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 0.6% per month. ( Do not round intermediate calculations. Enter your answer as percent rounded to 5 decimal places.)
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., 68 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…
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 0.60 R-square 0.65 Standard Deviation of Residuals 0.07 (1.e., 78 monthly) Required: 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 201 and 20.2) on each of these stocks are independent of each other. What is the residual standard deviation of the portfolio? (Round your percentage answer to 2 decimal places.) Residual standard deviation 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. Assume the risk-free rate is 0.9% per month. (Do not round intermediate calculations. Round your percentage answer…
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 Now suppose that the manager misestimates the beta of Waterworks stock, believing it to be 0.50 instead of 0.75. The standard deviation of the monthly market rate of return is 5%. Standard Deviation of Residuals 0.06 (i.e., 6% monthly) Required: a. If he holds a $6 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, what is the standard deviation of the (now improperly) hedged portfolio? The S&P 500 currently is at 3,000 and the contract multiplier is $50. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.) Standard deviation Probability of a negative return 0.00 b. What is the probability of incurring…
a) A fund manager has been monitoring the performance of Virgin Galactic Corporation shares (NYSE: SPCE). The shares are currently trading at $34.8 on the New York stock exchange. The fund manager predicts that SPEC shares might rise in value over the next few months. He checked the market and found the related information on the options with a maturity of two months as below. Assume the number of underlying shares per contract is 100 shares. (i) Please specify the moneyness of the following options. Are they in the money, at the money or out of the money? Strike $30 Call premium Moneyness $3.05 $3.9 $3.2 Put premium Moneyness $2.33 $4.5 $7.0 $34.5 $38 (ii) Which option would you suggest the fund manager to purchase? Why? (iii) How much would it cost if the fund manager purchases options in ii that cover 1,000,000 shares (ii)?
A fund manager has been monitoring the performance of Virgin Galactic Corporation shares (NYSE: SPCE). The shares are currently trading at $34.8 on the New York stock exchange. The fund manager predicts that SPEC shares might rise in value over the next few months. He checked the market and found the related information on the options with a maturity of two months as below. Assume the number of underlying shares per contract is 50 shares. (i) Please specify the moneyness of the following options. Are they in the money, at the money or out of the money? Table Attached (ii) Which option would you suggest the fund manager to purchase? Why? (iii)How much would it cost if the fund manager purchases options in ii that cover 1,000,000 shares (ii)?
A fund manager has been monitoring the performance of Virgin Galactic Corporation shares (NYSE: SPCE). The shares are currently trading at $34.8 on the New York stock exchange. The fund manager predicts that SPEC shares might rise in value over the next few months. He checked the market and found the related information on the options with a maturity of two months as below.Assume the number of underlying shares per contract is 100 shares. (i) Please specify the moneyness of the following options. Are they in the money, at the money or out of the money? (ii)Which option would you suggest the fund manager to purchase? Why? (iii)How much would it cost if the fund manager purchases options in (ii) that cover 1,000,000 shares (ii)?
Use the following data to answer the question regarding the performance of Guardian Stock Fund and the market portfolio. The risk- free return during the sample period was 5%. Average return Standard deviation of returns Beta Residual standard deviation Guardian 14% 26% Information ratio 1.2 4% Market Portfolio 10% 21% 1 0% Calculate the information ratio measure of performance for Guardian Stock Fund. (Round your answer to 2 decimal places. Do not round intermediate calculations.)