Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 2.0

image text in transcribed

Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 2.0 on the market index. Firm-specific returns all have a standard deviation of 32%. Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +3.0%, and the other half have an alpha of 3.0%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks. a. What is the expected profit (in dollars) and standard deviation of the analyst's profit? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) b. How does your answer change if the analyst examines 50 stocks instead of 20 stocks? 100 stocks? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 2.0 on the market index. Firm-specific returns all have a standard deviation of 32%. Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +3.0%, and the other half have an alpha of 3.0%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks. a. What is the expected profit (in dollars) and standard deviation of the analyst's profit? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) b. How does your answer change if the analyst examines 50 stocks instead of 20 stocks? 100 stocks? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Future Of Money How The Digital Revolution Is Transforming Currencies And Finance

Authors: Eswar S. Prasad

1st Edition

0674258444, 978-0674258440

More Books

Students also viewed these Finance questions

Question

Intersection and union of two set related to Fuzzy set theory

Answered: 1 week ago