Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume the return on a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all

Assume the return on 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 50%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 4.6%, and one-half have an alpha of 4.6%. The analyst then buys $1.2 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.2 million of an equally weighted portfolio of the negative-alpha stocks. a. What is the expected return (in dollars), and what is the standard deviation of the analysts profit? (Enter your answers in dollars not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

Expected return:

Standard deviation: b-1. How does your answer for standard deviation change if the analyst examines 50 stocks instead of 20? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Standard deviation: b-2. How does your answer for standard deviation change if the analyst examines 100 stocks instead of 20? (Enter your answer in dollars not in millions.)

Standard deviation:

image text in transcribed

Assume the return on 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 50 % Suppose an analyst studles 20 stocks and finds that one-half have an alpha of 4.6 %, and one-half have an alpha of -46 % The analyst then buys $1.2 million of an equally welghted portfollo of the positive-alpha stocks and sells short $1.2 milion of an equally welghted portfollo of the negative-alpha stocks. a. What is the expected return (In dollars), and what is the standard deviation of the analyst's profit? (Enter your answers in dollars not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount.) Expected return Standard deviation b-1. How does your answer for standard deviation change if the analyst examines 50 stocks Instead of 20? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Standard deviation b-2 How does your answer for standard devlation change If the analyst examines 100 stocks Instead of 20? (Enter your answer in dollars not in millions.) Standard deviation

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

More Books

Students also viewed these Finance questions