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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 stocks, and shorts $1 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.)

b. How does your answer change if the analyst examines 60 stocks instead of 20 stocks? 120 stocks? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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