he following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 1% over the coming month.

Standard DeviationBetaR-squareof Residuals.60.65.04 (i.e., 4% monthly)

a-1.If he holds a $4.8 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 1,280 and the contract multiplier is $250.

Number of contracts

a-2.Should he buy or sell contracts?

Sell

Buy

b.Assuming that monthly returns are approximately normally distributed, what is the probability that this market-neutral strategy will lose money over the next month? Assume the risk-free rate is 1.3% per month.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Probability%