Answered step by step
Verified Expert Solution
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 34% Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 2.1%, and one-half have an alpha of -2.1%. The analyst then buys $1.4 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.4 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 analyst's profit? (Enter your answers in dollars not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount.) Answer is complete but not entirely correct. $$ 44,000x Expected return Standard deviation 152,053 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.) Answer is complete but not entirely correct. $ 96,167( 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.) Answer is complete but not entirely correct Standard deviation $ 68,000 Suppose there are two independent economic factors, M and M2. The risk-free rate is 5%, and all stocks have independent firm specific components with a standard deviation of 40%. Portfolios A and Bare both well diversified 10 Beta on M1 Beta on M2 Portfolio Expected Return (%) points 1.8 2.2 30 -0.5 2.1 B What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct Expected return-beta relationship E(rP) 3.46x 5.83(BP2 8.53 BP1 +
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started