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% Suppose an analyst studies 20 stocks and finds that one-half have an alpha o 2.3%, and one-half have an alpha o stocks and sells short $1.2 million of an equally weighted portfolio of the negative-alpha stocks. 2.3%. The analyst then buys $1.2 million of an equally weighted portfolio of the positive alpha 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 S55200 $214662.5 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 b-2. How does your answer change if the analyst examines 100 stocks instead of 207 (Enter your answer in dollars not in millions.) Standard deviation

Explanation / Answer

b1. Change in stock as 50 instead of 20. So 55,200 each will be invested in positive & negative position

New Variance = 50 * (55,200 * (.4)) ^2 = 50 * (22,080) ^2 = 50 * 487,526,400 = 24,376,320,000.00

Sqrt(24,200,000,000)= $ 156,129.18

b2. With same formula applied above, change in stock as 100 instead of 20. But 27,200 each will be invested in positive & negative position

New Variance = 100 * (27,200 * (.4)) ^2 = 100 * (10,880) ^2 = 100 * 118,374,400 =    11,837,440,000.00

Sqrt(11,837,440,000.00) = $ 108,800.00

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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