The Shanghai Stock Exchange composite index on Jan 1, 2010 was at 3289.75, and had a dividend
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Question:
- The Shanghai Stock Exchange composite index on Jan 1, 2010 was at 3289.75, and had a dividend yield of approximately 0.9%.For simplicity, treat the index as a stock with P0 = 3289.75 and D1 = 29.60775.
The market consensus was that dividends would grow at the rate of g = 0.106 or 10.6% per year, which is equal to https://www.macrotrends.net/countries/CHN/china/gdp-growth-rateFor simplicity, assume that Chinese GDP and dividends on the Shanghai Stock Exchange composite index both grow at this rate in perpetuity.
- Based on the date above, what is the implied return of an investment in the Shanghai Stock Exchange composite index?
- If the expected rate of return on Chinese stocks remained at the same level as you calculated in part a) but the market's estimate of the dividend growth rate decreased to 8% per year (the growth rate of GDP in 2012), the Shanghai Composite Index will decline. What would be the new value of the index?
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