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 42%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3.4%, and one-half have an alpha of -3.4%. 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. Required: a. What is the expected profit (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 profit 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
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