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

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Finance

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 48%.

Suppose an analyst studies 20 stocks and finds that one-half havean alpha of 3.6%, and one-half have an alpha of –3.6%. 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), and what is thestandard deviation of the analyst’s profit? (Enter your answers indollars 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 theanalyst examines 50 stocks instead of 20? (Enter your answer indollars 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 theanalyst examines 100 stocks instead of 20? (Enter your answer indollars not in millions.)

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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 48%.Suppose an analyst studies 20 stocks and finds that one-half havean alpha of 3.6%, and one-half have an alpha of –3.6%. 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), and what is thestandard deviation of the analyst’s profit? (Enter your answers indollars 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 theanalyst examines 50 stocks instead of 20? (Enter your answer indollars 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 theanalyst examines 100 stocks instead of 20? (Enter your answer indollars not in millions.)