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

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Assume the return on a market index represents the common factorand all stocks in the economy have a beta of 1. Firm-specificreturns all have a standard deviation of 36%.

Suppose an analyst studies 20 stocks and finds that one-half havean alpha of 3.2%, and one-half have an alpha of –3.2%. The analystthen buys $1.6 million of an equally weighted portfolio of thepositive-alpha stocks and sells short $1.6 million of an equallyweighted portfolio of the negative-alpha stocks.

a. What is the expected return (in dollars), andwhat is the standard deviation of the analyst’s profit?(Enter your answers in dollars not in millions.Do not round intermediate calculations. Round your answersto the nearest dollar amount.)

b-1. How does your answer for standard deviationchange if the analyst examines 50 stocks instead of 20?(Enter your answer in dollars not in millions. Do not roundintermediate calculations. Round your answer to the nearest dollaramount.)

b-2. How does your answer for standard deviationchange if the analyst examines 100 stocks instead of 20?(Enter your answer in dollars not inmillions.)

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Assume the return on a market index represents the common factorand all stocks in the economy have a beta of 1. Firm-specificreturns all have a standard deviation of 36%.Suppose an analyst studies 20 stocks and finds that one-half havean alpha of 3.2%, and one-half have an alpha of –3.2%. The analystthen buys $1.6 million of an equally weighted portfolio of thepositive-alpha stocks and sells short $1.6 million of an equallyweighted portfolio of the negative-alpha stocks.a. What is the expected return (in dollars), andwhat is the standard deviation of the analyst’s profit?(Enter your answers in dollars not in millions.Do not round intermediate calculations. Round your answersto the nearest dollar amount.)b-1. How does your answer for standard deviationchange if the analyst examines 50 stocks instead of 20?(Enter your answer in dollars not in millions. Do not roundintermediate calculations. Round your answer to the nearest dollaramount.)b-2. How does your answer for standard deviationchange if the analyst examines 100 stocks instead of 20?(Enter your answer in dollars not inmillions.)