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Mrrafil [7]
3 years ago
5

Assume the return on a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific r

eturns all have a standard deviation of 42%. Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 3.4%, and one-half have an alpha of –3.4%. The analyst then buys $1.4 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.4 million of an equally weighted portfolio of the negative-alpha stocks.
Required:
a. What is the expected return (in dollars), and what is the standard deviation of the analyst’s profit?
b. How does your answer change if the analyst examines 50 stocks instead of 20?
c. How does your answer change if the analyst examines 100 stocks instead of 20?
Business
1 answer:
VashaNatasha [74]3 years ago
8 0

Answer:

a. The expected return, and the standard deviation of the analyst’s profit is $95,200 and $262,962.

b. If the analyst examines 50 stocks instead of 20 the Standard deviation would be $ 166,312

c. If the analyst examines 100 stocks instead of 20 the Standard deviation would be $ 117,600

Explanation:

a. In order to calculate the expected return and the standard deviation of the analyst’s profit we would have to make the following calculations:

Expected Return = 1400000*(3.4% + 1*Rm) - 1400000*(-3.4% + 1*Rm)

Expected Return = 47600 + 1400000Rm +47600 - 1400000Rm

Expected Return = $ 95,200

Equal Investment = 1400000/10 = 140000

Variance = 20*((140000*42%)^2) = $ 69,148,800,000

Standard deviation = Variance^(1/2)

Standard deviation = 69,148,800,000^(1/2)

Standard deviation = $ 262,962

b. if n= 50 Stock. then:

Equal Investment = 1400000/25 = 56000

Variance = 50*((56000*42%)^2) = $ 27,659,520,000

Standard deviation = Variance^(1/2)

Standard deviation = 27,659,520,000^(1/2)

Standard deviation = $ 166,312

c. if n= 100 Stock, then:

Equal Investment = 1400000/50 = 28000

Variance = 100*((28000*42%)^2) = $ 13,829,760,000

Standard deviation = Variance^(1/2)

Standard deviation = 13,829,760,000^(1/2)

Standard deviation = $ 117,600

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What is protectionism and why would a country base trade policy on it? Explain at least two reasons.
Anton [14]
Protectionism is a government or economic policy that does not allow foreign or international trade through methods and variety of government regulations outlined to promote fair competition with the goods and services made domestically. Business and workers were protected within a country through regulating or obstructing trade with different countries.

<span>A country should base trade policy for two reasons. 1.) It protects local businesses and jobs.  2.) It promotes fair competition on the local goods and services.</span>


3 0
3 years ago
Assets are 300,000 and equity is 100,000, assets increase 80,000 liabilities increase 50,000. what is equity at year end?
mojhsa [17]
<span>Assets - equity = liabilities
  So liability before the increase is:
 300, 000 - 100, 000 = 200, 000
 And if assets increases by 80, 000. Hence new assets = 380, 000. Liabilities increases by 50, 000; hence new liability = 250, 000.
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6 0
3 years ago
A liquid company produces hand sanitizer which has demand of 300,000 units per year.
jarptica [38.1K]

Answer:

EOQ =   =  15,491.93 units

Optimal order interval   18.8 days   (19.36  orders in year)

Total cost = $150,774.60

Explanation:

<em>The Economic Order Quantity (EOQ) is the order size that minimizes the balance of ordering cost and holding cost. At the EOQ, the carrying cost is equal to the holding cost.</em>

It is computed using he formulae below

EOQ = √ (2× Co× D)/Ch

<em>Co- ordering cost per order- 20, </em>

<em>Ch -Holding cost per unit per annum- 10%× $0.5=  0.05</em>

<em>Annual demand: D- 300,000</em>

EOQ = √(2× 20 * 2,580)/(10%× 0.5)

       =  15,491.93 units

Assuming 365 days, the optimal order interval in dates

Number of orders per year

= annual demand/EOQ

= 300,000/ 15,491.93

= 19.36 times

<u><em>in days:</em></u>

= EOQ/300,000 × 365 days

=   (15,491.93/ 300,000) × 365 days

= 18.8 days

Total annual cost =

<em>Total cost Purchase cost + Carrying cost + ordering cost </em>

                                                                                 $

Purchase cost = $0.5 × 300,000 =              150,000

Carrying cost = (15,491.93/2) * 10%*0.5 =       387.29

Ordering cost = (300,000/15,491.93 ) × 20 = <u>387.29</u>

Total cost                                                      1<u>50,774.60</u><u> </u>

       

5 0
3 years ago
You are creating a portfolio of two stocks. The first one has a standard deviation of 20% and the second one has a standard devi
Drupady [299]

Answer:

23.56

Explanation:

Standard deviation of  the first stock (σ1) = 20%

Standard deviation of  the second stock (σ2) = 37%

The correlation coefficient between the returns (ρ) = 0.1.

Proportion invested in the first stock (W1) = 43%

Proportion invested in the second stock (W2) = 57%

The standard deviation of a two-stock portfolio's returns is given by

\sigma_{portfolio} = \sqrt{w_1^2\sigma_1^2+w_2^2\sigma_2^2+2w_1w_2\rho\sigma_1\sigma_2} \\\sigma_{portfolio} = \sqrt{0.43^2*0.2^2+0.57^2*0.37^2+2*0.43*0.57*0.1*0.2*0.37}\\\sigma_{portfolio} =0.2356=23.56\%

The standard deviation of this portfolio's returns IS 23.56%

8 0
3 years ago
One of the goals of the Federal Reserve is price stability. For the Fed to achieve this​ goal,
rewona [7]

Answer:

The correct answer is option C.

Explanation:

One of the goals of the federal reserve banks is to have price stability in the economy. Though price stability does not imply zero inflation. A small level of inflation is good for economy as it helps in growth of production.

So in order to acheive the goal of price stability, the rate of inflation should be low such as 1-3% and it should be consistent.

Very high inflation is harmful for the economy as it erodes the real income and wealth. Deflation is also not good for economy as it causes reduction in production and employment

5 0
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