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Business, 16.11.2019 04:31 annabanana1298

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 33%.
suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3.1%, and one-half have an alpha of –3.1%. the analyst then buys $1.3 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.3 million of an equally weighted portfolio of the negative-alpha stocks.
a. what is the expected return (in dollars), and what is the standard deviation of the analyst’s profit?

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