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
