13 Compare the alphas between the two stocks Which appears more attractive

13 compare the alphas between the two stocks which

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13. Compare the alphas between the two stocks. Which appears more attractive? Compare the betas between the two stocks. Does the market exposure of Apple differ much from that of Dell? APPEL Alpha t-stat Beta t-stat 0.033452 3.085869891 1.3413 6.225822 DELL Alpha t-stat Beta t-stat -0.016219 -1.803222508 1.327056 7.424104 Comparing the Alphas and Betas of APPLE and DELL, We found APPLE has a more attractive alpha and the market exposure of APPLE does not differ much from that of DELL. Hedge funds often seek to earn absolute returns or “portable alpha.” This means the hedge fund captures a positive alpha from an asset while eliminating exposure to broad market movements. Suppose you want to create a “portable alpha” using these two stocks. Create a zero-cost long- short portfolio which shorts Dell and invests the proceeds in Apple (i.e. create a new series by subtracting Dell monthly returns from Apple monthly returns). Run a CAPM regression of this portfolio on market excess returns.
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14. Compute the difference between the two individual stock alphas estimated in (13). How does this number compare to the alpha on the long-short portfolio? Is the alpha significantly different from zero? Comment on this portfolio’s exposure to broad market movements. Is it significantly different from zero? Comparing the Alphas of APPLE and DELL we got in question 13, we should buy APPLE and short DELL. Thus, we got the portfolio which has the following data: Long-short portfolio Alpha t-stat Beta t-stat 0.04967 1 3.753564014 0.014244 0.054163 We found the Alpha is 0.049671 and it significantly different from zero. And the Beta is near zero but it does not significantly different from zero. 15. How much of your own money was required to construct this portfolio? What is the systematic risk of this portfolio? Whether the market goes up or down, what monthly return do you hope to receive from this portfolio? We think there is not money required because we can just buy APPLE and short DELL. From the question 14, we found the systematic risk of this portfolio is 0.014244. But there are two important things. First one is this number is very near zero. Second one is its t-statistic is much smaller than 1.96, so the systematic risk is not significantly different from zero. Therefore, whether the market goes up or down, monthly return we hope to receive from this portfolio is equal to the 5% (0.049671) on the portfolio.
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