Say you are a portfolio manager with a competitive advantage in picking stocks, capable of generating "alpha" (- extra return not explained by the risk in your portfolio). A client approaches you and asks for a lower risk strategy, but doesn't want to give up theyour stock picking can generate. You tell your client this isn't a problem you can use forward contracts on the S&P 500 and bonds to "port" yourto a bond return. Assume the continuously compounded risk free rate is 5%, that the current spot price of one unit of the S&P, the current value of your stock portfolio, and the spot price of one Treasury bond are all equal to $2,000.(3 points for all parts of this problem)

1. BRIEFLY explain how you could convert your stock returns to bond returns (assume a horizon/maturity of one year).
2. If expectedeffective annual returnon the S&P () is 10%, your= 2%, and the expectedeffective annual returnon your portfolio is, what is the expected spot price in one year of your portfolio? What is the expected spot price in one year of one unit of the S&P 500?
3. What should the forward price be for one unit of the S&P?
4. What should the forward price be for one Treasury Bond?
5. If the future spot price of the Treasury Bond is $2,120, what is the expected total value of your positions from part (a) in one year's time?
6. What is theeffective annual returnon this strategy?