Part I

Calvin received the following research report from an investment consultant. Unfortunately, the beta coefficient for HK Speed is not available.

	Expected Return	Beta	Standard Deviation
Hang Seng Index (HSI)	10%		n/a
HK Speed	n/a	n/a	25%
Risk-free Rate	5%

n/a: data not available

Recently, the Chairman of HK Speed has made the following announcement: From now on, the dividend growth of the company will maintain at a constant rate of 5% per year indefinitely. We foresee the dividend for next year is $1.1 per share. The closing stock price for HK Speed is $20 on that day. Required (Write the FM equations first in your answers):

(a) Using the Dividend Growth Model (DGM), compute the total annual return of HK Speed?

(b) Using the CAPM, find the beta coefficient of HK Speed? State any assumption(s) used.

Part II

The betas of Stock A and Stock B are 1.5 and 1.2 respectively. You formed a portfolio consists of 20% Stock A, 35% Stock B, and the remaining is a risk-free asset.

Required:

(a) Find the beta of the portfolio.

(b) If the Central Bank announced an unexpected increase in market interest rate, what would be the impact on the return of Stock A and B? (Answer limited to 55 words)