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 30%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3%, and one-half have an alpha of -3%. The analyst then buys $1 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1 million of an equally weighted portfolio of the negative-alpha stocks. Required: a. What is the expected profit (in dollars), and what is the standard deviation of the analyst's profit? (Enter your answers in dollars in millions. Round your answers to the nearest dollar amount.) ✔ Answer is complete and correct. $ $ Expected profit Standard deviation 60,000✔✓ 134,164

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 30%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3%, and one-half have an alpha of -3%. The analyst then buys $1 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1 million of an equally weighted portfolio of the negative-alpha stocks. Required: a. What is the expected profit (in dollars), and what is the standard deviation of the analyst's profit? (Enter your answers in dollars in millions. Round your answers to the nearest dollar amount.) ✔ Answer is complete and correct. $ $ Expected profit Standard deviation 60,000✔✓ 134,164

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 4P: An analyst has modeled the stock of a company using the Fama-French three-factor model. The market...

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An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
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