Q1. (16 points) Inspired by the boom of the US stock market over the last year,...

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Q1. (16 points) Inspired by the boom of the US stock market over the last year, you register an account at Robinhood and would like to make some stock investment in the US market. After screening the popular stocks, you would like to consider the stocks of Apple, Amazon, and Walmart. The information about each of these stocks are below. Apple: the current stock price is $120 per share. A $1 dividend is expected to be paid next year and the stock price next year is expected to be $143 per share. Amazon: the current stock price is $3,000 per share and the stock's beta is 1.2. Walmart: the current stock price is $140 per share. The company is expected to pay a $2.8 dividend next year and the dividend payment is expected to grow at a constant rate of 6% per year. The stock's beta is 0.6. Besides, the YTM of the three-month US Treasury Bill is 2%. Assume the US stock market is efficient and all CAPM assumptions hold in this market. a. (3 Points) What is the expected return for each of these three stocks? (Hint: When the expected stock price next year is known, the expected return is the expected dividend yield plus the expected capital gains yield.) b. (2 Points) What is the market risk premium and what is the risk-free rate? c. (5 Points) In your portfolio, you target to buy Apple, Amazon, and Walmart. In this portfolio, you just purchased 100 shares of Apple and 20 shares of Amazon at the current market prices. How many shares of Walmart do you have to purchase if you want your portfolio beta to be equal to 1? d. (3 Points) Assume that you now have a portfolio of three stocks as described above (with beta=1). Concerned with the future volatility in the market, you would like to reduce the portfolio systematic risk by 20%. You understand that you can lower the risk by adding the risk-free asset in your portfolio. How much money do you have to invest in the risk-free asset? e. (3 Points) Recently a company called Popmart get listed in the Hong Kong stock exchange. The stock has an expected return of 18% and a beta of 1.8. If the risk- free rate and market risk premium in Hong Kong is the same as in US, would you invest in the stock of Popmart and why? (Must provide explanation to get any point.) Q1. (16 points) Inspired by the boom of the US stock market over the last year, you register an account at Robinhood and would like to make some stock investment in the US market. After screening the popular stocks, you would like to consider the stocks of Apple, Amazon, and Walmart. The information about each of these stocks are below. Apple: the current stock price is $120 per share. A $1 dividend is expected to be paid next year and the stock price next year is expected to be $143 per share. Amazon: the current stock price is $3,000 per share and the stock's beta is 1.2. Walmart: the current stock price is $140 per share. The company is expected to pay a $2.8 dividend next year and the dividend payment is expected to grow at a constant rate of 6% per year. The stock's beta is 0.6. Besides, the YTM of the three-month US Treasury Bill is 2%. Assume the US stock market is efficient and all CAPM assumptions hold in this market. a. (3 Points) What is the expected return for each of these three stocks? (Hint: When the expected stock price next year is known, the expected return is the expected dividend yield plus the expected capital gains yield.) b. (2 Points) What is the market risk premium and what is the risk-free rate? c. (5 Points) In your portfolio, you target to buy Apple, Amazon, and Walmart. In this portfolio, you just purchased 100 shares of Apple and 20 shares of Amazon at the current market prices. How many shares of Walmart do you have to purchase if you want your portfolio beta to be equal to 1? d. (3 Points) Assume that you now have a portfolio of three stocks as described above (with beta=1). Concerned with the future volatility in the market, you would like to reduce the portfolio systematic risk by 20%. You understand that you can lower the risk by adding the risk-free asset in your portfolio. How much money do you have to invest in the risk-free asset? e. (3 Points) Recently a company called Popmart get listed in the Hong Kong stock exchange. The stock has an expected return of 18% and a beta of 1.8. If the risk- free rate and market risk premium in Hong Kong is the same as in US, would you invest in the stock of Popmart and why? (Must provide explanation to get any point.)

Answer rating: 100% (QA)

Stock Investment Analysis a Expected Return Apple Dividend yield 1 120 00083 083 Capital gains yield 143 120 120 01917 1917 Expected return 00083 0191... View the full answer