Assume a market index represents the common factor and all stocks in the economy

Question

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 40% 239 The analyst en buys S1 2 milion of an equally o i he positive-alpha Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 23%, and one-half have an alpha of stocks and sells short $1.2 million of an equally weighted portfolio of the negative-alpha stocks. e hte o 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.) Expected return Standard deviation b-1. How does your answer 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.) Standard deviation S b-2. How does your answer change if the analyst examines 100 stocks instead of 20? (Enter your answer in dollars not in millions.) Standard deviation

Explanation / Answer

Expected return = 1200000 * ( 0.023 + 1*Rm ) - 1200000 * ( -0.023 + 1*Rm )

   = 1200000 * 0.046

   = 55200

Standard deviation = sqrt( 20 * ((1200000/10) * 0.23 )2 )

   = sqrt (15235200000)

= 123431

b-1)

if n = 50 (25 long, 25 short)

Standard deviation = sqrt ( 50 * ((1200000/25) * 0.23 )2 )

   = sqrt ( 6094080000 )

   = 78065

b-2)

if n = 100 (50 long, 50 short)

Standard deviation = sqrt ( 100 * ((1200000/50) * 0.23 )2 )

   = sqrt ( 3047040000 )

   = 55200

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.