INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 10, Problem 7PS
A
Summary Introduction
To calculate: Expected profit and standard deviation of the portfolio.
Introduction: Expected profit of the portfolio is tells us about the possibility of profit by taking some assumptions and compare with the initial capital. Standard deviation tells us about the fluctuations about the mean value.
B
Summary Introduction
To calculate: Standard deviation for the 50 stocks and 100 stocks.
Introduction: Standard deviation is defined as the variations of the values around mean value. The low standard deviation tells us about the values which are close to the mean value where as the large value of standard deviation tells us that values are wide spread from the mean value.
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Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1 on the market index. Firm-specific returns all have a standard deviation of 30%.Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +2%, and the other half have an alpha of −2%. Suppose the analyst invests $1 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks.a. What is the expected profit (in dollars) and standard deviation of the analyst’s profit?b. How does your answer change if the analyst examines 50 stocks instead of 20 stocks? 100stocks?
Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1.7 on the market index. Firm-specific returns all have a standard deviation of 25%.
Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +2.5%, and the other half have an alpha of -2.5%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks.
a. What is the expected profit (in dollars) and standard deviation of the analyst's profit (round to nearest whole dollar amount)?
Expected profit (in dollars)
Standard deviation
b. How does your answer change if the analyst examines 50 stocks instead of 20 stocks? 100 stocks (round to nearest whole dollar amount)?
50 stocks
100 stocks
Standard deviaton
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 31%.
Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 2.0%, and one-half have an alpha of –2.0%. The analyst then buys $1.1 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.1 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 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 the analyst examines 50 stocks instead of 20?
Chapter 10 Solutions
INVESTMENTS(LL)W/CONNECT
Ch. 10 - Prob. 1PSCh. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Prob. 4PSCh. 10 - Prob. 5PSCh. 10 - Prob. 6PSCh. 10 - Prob. 7PSCh. 10 - Prob. 8PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PS
Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PSCh. 10 - Prob. 13PSCh. 10 - Prob. 14PSCh. 10 - Prob. 15PSCh. 10 - Prob. 16PSCh. 10 - Prob. 17PSCh. 10 - Prob. 18PSCh. 10 - Prob. 19PSCh. 10 - Prob. 1CPCh. 10 - Prob. 2CPCh. 10 - Prob. 3CPCh. 10 - Prob. 4CPCh. 10 - Prob. 5CPCh. 10 - Prob. 6CPCh. 10 - Prob. 7CPCh. 10 - Prob. 8CP
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