Problem 6

Suppose you have a new measure for stocks' exposure to pandemic risk, calculated daily for every stock. Consider the following statements / possibilities:

i. Pandemic risk is priced (i.e., reflected in expected returns)

ii. A trading strategy can be formed based on this measure to bring profits

iii. If exposure to pandemic risk is related to expected returns, then the relation is represented by industry characteristics rather than individual stock characteristics,

Discuss how you can empirically test the plausibility of the statements above using this new measure and historical stock returns data. Please be specific about the steps, hypothetical findings, and how those findings link to potential conclusions.