The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 2% over the coming month.

Beta	R-square	Standard Deviation of Residuals
0.75	0.65	0.03 (i.e., 3% monthly)

Required:

a-1. If he holds a $13.6 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 2,000 and the contract multiplier is $50.

a-2. Should he buy or sell contracts? multiple choice:

Sell

Buy

b. Assuming that monthly returns are approximately normally distributed, what is the probability that this market-neutral strategy will lose money over the next month? Assume the risk-free rate is 1.2% per month. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.)