Question 3 (Total 40 marks) A) Maximizing Your Investment Strategies in a Volatile Market (23 Jan 2023, BusinessNews)1 Recently, Morgan Stanleys Mike Wilson warned about the stock markets hall of mirrors saying that the recent uptick in market performance doesnt necessarily mean that things are changing and that investors need to be prepared. And when it comes to investment strategies, knowledge is power. In this changing environment of the stock market, investors need to stay informed and have a plan for their portfolio, come what may. Diversifying your portfolio is one of the most important steps you can take to protect and grow your investments. By spreading your money across different asset classes, such as stocks, bonds, and cash, you can reduce risk while potentially earning returns over time. Stocks are often considered high-risk investments because their value can fluctuate greatly in response to market conditions. However, they also have the potential for higher returns over time than other asset classes. Investing in stocks lets you take advantage of growth opportunities that may not be available with other types of investments. Bonds are generally viewed as less risky investments than stocks because their prices remain relatively stable even when the stock market experiences volatility. They also provide steady income through regular interest payments throughout the life of the bond. This makes them an attractive option for investors who want more stability in their portfolio but dont want to miss out on potential gains from stock market volatility. Cash is another way to diversify your portfolio by providing liquidity and stability during times of uncertainty or market downturns. Cash holdings allow investors to quickly access funds when needed without having to sell assets at a loss due to sudden changes in market conditions or economic events such as recessions or pandemics. Regular rebalancing is important to maintaining a diversified portfolio that meets your goals and objectives over time. Rebalancing involves periodically adjusting the amount invested in each asset class based on current market conditions and performance trends so that it aligns with your overall strategy and risk tolerance level. Doing so means that any losses from one type of investment can be offset by gains made elsewhere in your portfolio, thus maximizing long-term returns while minimizing the risks associated with investing.

A(i) Based on the above information and lecture notes, do you agree Investment portfolio can eliminate all the market risks? (12 marks) (

ii) Based on the above information and lecture notes, state the difference between stocks and bonds. (8 marks)

B) (i) If the correlation between Stock C and Stock D is equal to -0.55; the correlation between Stock C and Stock E is equal to +0.15, how do you interpret these numbers and which stocks will you invest? (4 marks)

(ii) Stock G with a beta of 1.33. The market risk premium is 8.5 percent and the risk-free rate is 3.8 percent. What is the expected return on this stock? How do you interpret the beta? (4 marks)

C(i) Stock K had just paid a dividend of $5 per share this morning. The plowback ratio (b) of the company is 25% while the return on equity (ROE) is 12%, investors require a return rate of 10% on common stock of similar companies, calculate the intrinsic value of Stock K. (4 marks)

(ii) The App Store needs to raise $2.2 million for an expansion project. The firm wants to raise this money by selling zero coupon bonds with a par value of $1,000 that mature in 20 years. The market yield on similar bonds is 8.8 percent. How many bonds must The App Store sell to raise the money it needs? (Assume semiannual compounding.)