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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 -
Assume the return on a market index represents the common factor and all stocks in the economy have a beta of Firmspecific
returns all have a standard deviation of
Suppose an analyst studies stocks and finds that onehalf have an alpha of and onehalf have an alpha of The analyst
then buys $ million of an equally weighted portfolio of the positivealpha stocks and sells short $ million of an equally weighted
portfolio of the negativealpha 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.
Answer is complete but not entirely correct.
b How does your answer for standard deviation change if the analyst examines stocks instead of 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.
b How does your answer for standard deviation change if the analyst examines stocks instead of Enter your answer in
dollars not in millions.
Answer is complete but not entirely correct.
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