You are 28 years of age (very young and very wise). Your birthday is in 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 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 Consumer Price Index at an annual rate of 2%, which is aligned with the target rate of the Federal Reserve System. 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 recently employed -- and will choose from the securities listed below, ten 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 2019 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.

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. Expected Stock Annual Return Beta Amazon (AMZN) 9% 1.60 Apple (AAPL) 11% 1.20 Alphabet (GOOGL) 10% 1.00 Johnson & Johnson (JNJ) 8% 0.70 J.P. Morgan (JPM) 11% 1.10 McDonalds (MCD) 7% 0.60 Stryker (SYK) 9% 0.80 3M (MMM) 10% 1.10 Wal-Mart (WMT) 6% 0.60 Wendys (WEN) 8% 0.70 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 b. (5 points) 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. A young person can afford to take greater risks in the quest for high returns. I am 26 years old now and I will become 65 in 2055. I have 39 years to reach my goal of "after-tax sum of $1.5 million".