Question

In: Finance

Assume the return on a market index represents the common factor and all stocks in the...

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 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. What is the expected return (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.)

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.)

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.)

Solutions

Expert Solution


Related Solutions

Assume the return on a market index represents the common factor and all stocks in the...
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 49%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 2.6%, and one-half have an alpha of –2.6%. The analyst then buys $1.7 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.7 million of an equally weighted portfolio of the...
Assume the return on a market index represents the common factor and all stocks in the...
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 36%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3.2%, and one-half have an alpha of –3.2%. 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...
Assume the return on a market index represents the common factor and all stocks in the...
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 50%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 4.6%, and one-half have an alpha of –4.6%. The analyst then buys $1.2 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.2 million of an equally weighted portfolio of the...
Assume the return on a market index represents the common factor and all stocks in the...
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 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...
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....
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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT