Assume a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 41%.

Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 4.3%, and one-half have an alpha of 4.3%. The analyst then buys $1.3 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.3 million of an equally weighted portfolio of the negative-alpha stocks.

*What is the expected return (in dollars), and what is the standard deviation of the analysts profit.

Expected Return ?

Standard Deviation ?

*How does your answer change if the analyst examines 50 stocks instead of 20.

Standard Deviation ?

*How does your answer change if the analyst examines 100 stocks instead of 20?

Standard Deviation ?