Problem
1. Write down the steps (no calculation) to show how you would carry out the long- short strategy based on CAPM in practice.
2. During the risk-on period, investors expect a better growth prospect and performance of the market. According to CAPM, which characteristic(s) of stocks should have a better performance? How does it affect your security market line (SML) when money is cheap during risk-on period?
3. You suspect that there are other risks should be priced in CAPM. What are the possible risk factors you would consider and include them in your asset pricing models?