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 0.65 Standard Deviation of Residuals 0.1 (1.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 %
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 0.65 Standard Deviation of Residuals 0.1 (1.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 %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text: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 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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