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 1.3 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 $2.0 million of an equally weighted portfolio of the negative alpha stocks.
a. What is the expected profit (in dollars) and standard deviation of the analyst’s profit? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Enter your answer in dollars, not millions. Omit the "$" sign in your response.)
| Expected profit (in dollars) | $ |
| Standard deviation | $ |
b. How does standard deviation change if the analyst examines 40 stocks instead of 20 stocks? 80 stocks? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Enter your answer in dollars, not millions. Omit the "$" sign in your response.)
| 40 stocks | 80 stocks | |
| Standard deviation | $ | $ |
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS,
FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 2 years agoRelated Solutions
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Assume that stock market returns have the market index as a common factor, and that all...
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deviation of 40%.
Suppose that an analyst studies 20 stocks and finds that one-half
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Assume that stock market returns have the market index as a common factor, and that all...
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Suppose that an analyst studies 20 stocks and finds that
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Assume that stock market returns have the market index as a common factor, and that all...
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common factor, and that all stocks in the economy have a beta of
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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...
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deviation of 35%.
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