(a) To calculate: The number of contracts that should be entered, if he holds a $ 6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index. Introduction: Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Question

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…

Answer 1

Question

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

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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 attached file contains hypothetical data for working this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends. If you formed a portfolio that consisted of 60% Goodman stock and 40% Landry stock, what would be its beta and its required return?

The following are the end-of-month prices for both the Standard & Poor's 500 Index and Nike's common stock. a. Using the data in the popup window, calculate the holding-period returns for each of the months. b. Calculate the average monthly return and the standard deviation for both the S&P 500 and Nike. c. Develop a graph that shows the relationship between the Nike stock returns and the S&P 500 Index. (Show the Nike returns on the vertical axis and the S&P 500 Index returns on the horizontal axis.) d. From your graph, describe the nature of the relationship between Nike stock returns and the returns for the S&P 500 Index.

Answer 2

Question

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

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Answer 3

Question

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

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Answer 4

Question

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

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Answer 5

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 6

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 7

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 8

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Answer 9

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Answer 10

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 11

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 12

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Ch. 26 - Prob. 1PS Ch. 26 - Prob. 2PS Ch. 26 - Prob. 3PS Ch. 26 - Prob. 4PS Ch. 26 - Prob. 5PS Ch. 26 - Prob. 6PS Ch. 26 - Prob. 7PS Ch. 26 - Prob. 8PS Ch. 26 - Prob. 9PS Ch. 26 - Prob. 10PS

Solution Summary: The author explains that hedging is the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments.

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Chapter 26 Solutions

Solution Summary: The author explains that hedging is the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments.

(b) To calculate: The standard deviation of the monthly return of the hedged portfolio Introduction: Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Chapter 26 Solutions

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.