Question: Suppose that two stocks, A and B, have the same beta = 1. The standard deviations of the idiosyncratic returns for the two stocks, A

Suppose that two stocks, A and B, have the same beta = 1. The standard deviations of the idiosyncratic returns for the two stocks, A and B, are the same and equal to 30% (Using the notation in our class, A = B = 30%). Suppose that an analyst uses CAPM to study the two stocks, and finds that stock A has an alpha of 2% and the stock B has an alpha of 2%. Suppose the analyst buys $10,000 of stock A, and short sells $10,000 of stock B.

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