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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
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 37%. Suppose an analyst studles 20 stocks and finds that one-half have an alpha of 2.2%, and one-half have an alpha of 2.2%. The analyst then buys $17 million of an equally weighted portfolio of the positive-alpha stocks and sells short $17 million of an equally weighted portfolio of the negative-aipha stocks. a. What is the expected protit (in dollars), and what is the standard deviation of the analyst s protit? (Enter your answers in dollars not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount.) 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.) 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.)
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