a) You have formed a portfolio worth $1,575,000 which you believe will exhibit an alpha of 2.5% over the next month. Unfortunately, you are uncertain about the direction of the market over this same period of time, and given your portfolios beta of 1.8, you are concerned about its exposure to adverse market movements. As a result, you wish to hedge your portfolios market exposure using S&P 500 e-mini futures contracts. The S&P 500 is currently at 2,100, and the contract multiplier is $50. Assume that the risk-free rate of return is 2.4% p.a.

Required: i. How many contracts must you enter, in order to hedge your market exposure? In your answer, also indicate whether you need to buy or sell the contracts. (1 Mark)

ii. What is your position in the futures contracts, at the end of the month? (3 Marks)

iii. What are your hedged proceeds at the end of the month? (2 Marks)

b) In class, we identified a number of constraints on investments in the context of investment management. Identify and describe two such constraints that apply to mutual funds. (4 Marks)