Problem 3: Risk management in CAPM model Consider the trading strategies with the following CAPM regressions a) Consider trading strategy 1/2(R1Rf)+1/2(R2Rf). What does this trading strategy involve? i.e. explain where it gets the money from and where it invests into. b) What would be CAPM pricing error and risk factor exposures for this strategy? CAPM a CAPM b c) Assume you use VOO to COMPLETELY hedge your market exposure to strategy in a) and the value of your position is $100,000. Using the current price of VOO (find it yourself and write it down here) how many contracts of VOO you should long/short? VOO price # shares d) Consider a hypothetifcal scenario when market goes down by 1%. What would be the gain/loss on your original/unhedged position in a). What would be the change in VOO position in c). Change in unhedge position Change in VOO position Total change Problem 3: Risk management in CAPM model Consider the trading strategies with the following CAPM regressions a) Consider trading strategy 1/2(R1Rf)+1/2(R2Rf). What does this trading strategy involve? i.e. explain where it gets the money from and where it invests into. b) What would be CAPM pricing error and risk factor exposures for this strategy? CAPM a CAPM b c) Assume you use VOO to COMPLETELY hedge your market exposure to strategy in a) and the value of your position is $100,000. Using the current price of VOO (find it yourself and write it down here) how many contracts of VOO you should long/short? VOO price # shares d) Consider a hypothetifcal scenario when market goes down by 1%. What would be the gain/loss on your original/unhedged position in a). What would be the change in VOO position in c). Change in unhedge position Change in VOO position Total change