part a: On April 1, an investor holds 40,300 shares of a certain stock. The market price is $25 per share. The investor is interested in completely hedging against movements in the market over the next month and decides to use the June Mini S&P 500 futures contract. The index is currently 4000 and one contract is for delivery of $50 times the index. The beta of the stock is 1.9. What strategy should the investor follow.

Solution: The answer to part a is that a short position in 10 contracts is required. It will be profitable if the stock outperforms the market in the sense that its returns is greater than that predicted by the capital asset pricing model.

part b: Now after a month the investor wishes to partially unwind their hedge to a target beta of 1.2. using your answer from part a which is (The answer to part a, is that a short position in 10 contracts is required. It will be profitable if the stock outperforms the market in the sense that its returns is greater than that predicted by the capital asset pricing model), what strategy should the investor follow? They still hold 40,500 shares and the market price is now $27 per share. The June Mini S&P Futures index is still at 4,000 and one contract for delivery is of $50 times the index. What will be the residual remaining position in their futures contracts? Answer only part b..