Thefollowingispartof…Thefollowingispartof thecomputeroutputfromaregressionofmonthlyreturnsofWaterworksstockagainstthe S&P 500indexmonthlyreturns. AhedgefundmanagerbelievesthatWaterworksisunderpriced,withanalphaof 2%overthecomingmonth.BetaR-squareStandarddeviation0.90.50.055 (i.e. 5.5%monthly)(4points)Ifheholdsa $5millionportfolioofWaterworksstock, andwishestohedgemarketexposurefor thenextmonthusing1-monthmaturityS&P 500futurescontracts,howmanycontractsshouldheenter?Shouldhebuyorsellcontracts? The S&P 500currentlyisat1,200 and thecontractmultiplieris$250.(3points)Whatistheannualisedstandarddeviationof themonthlyreturnof thehedgedportfolio?Business Finance FINANCE N1559

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