Question
In: Finance
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1 on the market index. Firm-specific returns all have a standard deviation of 30%.
Suppose that an analyst studies 20 stocks, and finds that one-half have an alpha of 2%, and the other half an alpha of −2%. Suppose the analyst buys $1 million of an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks.
a. What is the expected profit (in dollars) of overall portfolio and standard deviation of the analyst's overall portfolio return?
b. How does your answer on variance and standard deviation of overall portfolio return if the analyst examines 50 stocks instead of 20 stocks?
Solutions
jeff jeffy answered 1 month agoRelated Solutions
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock
market returns have the market index as a common factor, and that
all stocks in the economy have a beta of 1.3 on the market index.
Firm-specific returns all have a standard deviation of 35%.
Suppose that an
analyst studies 20 stocks, and finds that half have an alpha of
+1.8%, and the other half an alpha of –1.8%. Suppose the analyst
buys $2.0 million of an equally weighted portfolio of the positive
alpha stocks and shorts...
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock market returns have the market index as a
common factor, and that all stocks in the economy have a beta of
1.6 on the market index. Firm-specific returns all have a standard
deviation of 20%. Suppose that an analyst studies 20 stocks and
finds that one-half of them have an alpha of +2.4%, and the other
half have an alpha of −2.4%. Suppose the analyst invests $1.0
million in an equally weighted portfolio of the positive alpha...
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock market returns have the market index as a
common factor, and that all stocks in the economy have a beta of
1.9 on the market index. Firm-specific returns all have a standard
deviation of 40%.
Suppose that an analyst studies 20 stocks and finds that
one-half of them have an alpha of +2.8%, and the other half have an
alpha of −2.8%. Suppose the analyst invests $1.0 million in an
equally weighted portfolio of the positive alpha...
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock market returns have the market index as a
common factor, and that all stocks in the economy have a beta of
1.8 on the market index. Firm-specific returns all have a standard
deviation of 40%.
Suppose that an analyst studies 20 stocks and finds that one-half
of them have an alpha of +2.8%, and the other half have an alpha of
−2.8%. Suppose the analyst invests $1.0 million in an equally
weighted portfolio of the positive alpha...
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock market returns have the market index as a
common factor, and that all stocks in the economy have a beta of
1.2 on the market index. Firm-specific returns all have a standard
deviation of 25%.
Suppose that an analyst studies 20 stocks and finds that
one-half of them have an alpha of +1.6%, and the other half have an
alpha of −1.6%. Suppose the analyst invests $1.0 million in an
equally weighted portfolio of the positive alpha...
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock market returns have the market index as a
common factor, and that all stocks in the economy have a beta of
1.9 on the market index. Firm-specific returns all have a standard
deviation of 40%. Suppose that an analyst studies 20 stocks and
finds that one-half of them have an alpha of +2.8%, and the other
half have an alpha of −2.8%. Suppose the analyst invests $1.0
million in an equally weighted portfolio of the positive alpha...
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock market returns have the market index as a
common factor, and that all stocks in the economy have a beta of
1.8 on the market index. Firm-specific returns all have a standard
deviation of 35%.
Suppose that an analyst studies 20 stocks and finds that
one-half of them have an alpha of +2.6%, and the other half have an
alpha of −2.6%. Suppose the analyst invests $1.0 million in an
equally weighted portfolio of the positive alpha...
Assume a market index represents the common factor and all stocks in the economy have a...
Assume 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 48%.
Suppose an analyst studies 20 stocks and finds that one-half
have an alpha of 3.6%, and one-half have an alpha of –3.6%. The
analyst then buys $1.6 million of an equally weighted portfolio of
the positive-alpha stocks and sells short $1.6 million of an
equally weighted portfolio of the negative-alpha stocks.
a....
Assume a market index represents the common factor and all stocks in the economy have a...
Assume 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 41%. Suppose an analyst studies 20
stocks and finds that one-half have an alpha of 4.3%, and one-half
have an alpha of –4.3%. The analyst then buys $1.3 million of an
equally weighted portfolio of the positive-alpha stocks and sells
short $1.3 million of an equally weighted portfolio of the
negative-alpha stocks. a....
Assume a market index represents the common factor and all stocks in the economy have a...
Assume 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 31%. Suppose an analyst studies 20
stocks and finds that one-half have an alpha of 2.0%, and one-half
have an alpha of –2.0%. The analyst then buys $1.1 million of an
equally weighted portfolio of the positive-alpha stocks and sells
short $1.1 million of an equally weighted portfolio of the
negative-alpha stocks. a....
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