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 % - What is the probability of incurring a loss on improperly hedged portfolio over the next month if the monthly market return has an xpected value of 1% and a standard deviation of 11%? The manager holds a $4 million portfolio of Waterworks stock, and wishes to edge 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 me contract multiplier is $50. Assume the risk-free rate is 0.2% per month. (Enter your answer as percentages and not as a numbers, -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 2.3% 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 % - What is the probability of incurring a loss on improperly hedged portfolio over the next month if the monthly market return has an xpected value of 1% and a standard deviation of 11%? The manager holds a $4 million portfolio of Waterworks stock, and wishes to edge 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 me contract multiplier is $50. Assume the risk-free rate is 0.2% per month. (Enter your answer as percentages and not as a numbers, -g., enter "12%" and not "0.12".) Probability of a negative return %
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter8: Time Series Analysis And_forecasting
Section: Chapter Questions
Problem 16P: The following table reports the percentage of stocks in a portfolio for nine quarters: a. Construct...
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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
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 2.3% 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 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
%
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