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  3. 1. the following average annualized returns are ob

1. The following average annualized returns are obtained for over various holding periods: ...

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Finance

1. The following average annualized returns are obtained for over various holding periods:

Current

1 year

2 years

3 years

5 years

20 years

Hang Seng Index

N/A

-4.29%

12.36%

15.05%

10.29%

14.08%

Exchange Fund Bill Yield

0.66%

1.08%

1.12%

1.58%

1.46%

4.81%

Required:

  1. What would be your best estimate of market risk premium for Hong Kong equity?
  2. If expected inflation rate increases by 1%, what would happen to market risk premium?
  3. Determine expected market return.

2. A value-weighted mini-index initially contains two stocks A and B, with pre-determined number of shares. The index value at t=0 is defined to be 100.

Stock

Number of Shares

t=0

t=1

t=2

A

400

$20

$21

$22

B

200

$10

$12

$13

C

100

$ 4

$ 5

$ 6

Required:

  1. What would be the index value at t=1?
  2. Suppose that the stock exchange decides to add stock C to the mini-index at t=1. Work out index value at t=2.
  3. What is the advantage of a value-weighted market index, as compared with an equally weighted market index?

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