You are 26 years of age (very young and very wise). Your birthday is December. Using a series of monthly contributions, you are determined to build an investment portfolio that will enable you to reach an inflation-adjusted, after-tax sum of at least $1.5 million by the time you reach the ripe young age of 65. Please assume the present tax structure remains in place for the length of your investment horizon and that the long-run inflation factor is approximated by the 10-year increase in the Consumer Price Index, from February of 2006 through February of 201, or from 199 to 237 (as obtained from the U.S. Department of Labor). However, in being moderately risk-averse, you are not willing to take unnecessary risks (e.g., portfolios dominated by large-beta stocks, speculating with options, selling short, etc.), and you prefer a buy-and-hold strategy, as opposed to one based on frequent trading. To get started, assume that you begin with $10,000 -- accumulated since paying off your Seton Hall MBA loan -- and will choose from the securities listed below, eight of which are individual stocks, with their respective expected twelve-month returns and betas. Which ones will you choose? Why? As part of your analysis, assume you will make your first payment in June of 2016 and your last payment when you turn 65.

As part of your estimates, and to make sure the security returns in your portfolio are not strongly positively correlated with each other, you will have to compute the correlation between each pair of security returns. The data from which to do so are posted on Blackboard. They run from January of 2010 through February of 2016, 62 data points per security. Please be sure to show ALL your work and describe how you have arrived at the results. For the foreseeable future, if the maximum amount that you can save per month is $1,000.00, how likely is it that you will reach your goal? Please explain and show how you have arrived at your conclusion. If the price of one of the stocks you have selected rises faster than you had expected, but you still want to hold the stock for the long term, how will you hedge your risk? Please be thorough and specific.

Expected

Stock Annual Return Beta

Apple (AAPL) 11% 0.95

Boeing 9% 1.10

Cracker Barrel (CBRL) 7% 0.50

Exxon Mobil (XOM) 6% 0.90

Johnson & Johnson (JNJ) 8% 0.60

J.P. Morgan (JPM) 10% 1.70

3M (MMM) 9% 1.10

McDonalds (MCD) 6% 0.50

20-year Aaa corporate bonds 4.0% 0.20

Three-month U.S. Treasury bills 0.20% 0

Ten-year Treasury note 2.50% 0

S&P 500 (Vanguard 500 VFINX) 8% 1