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. (Hint: If CAPM holds, then expected return of any stock i is Ri = i + Rf + i(Rm Rf ) + i. Rf is the risk-free return, Rm is the market return and i is the idiosyncratic return. The expectation of the idiosyncratic return for any stock is equal to 0%. Think about the covariance of idiosyncratic returns for any two stocks.)

What is the expected & standard deviation of the analyst's profit?