Project Beta

FIN4502 – SECURITIES ANALYSIS - FINAL PROJECT (15 Points)

This project will provide you with a broad overview of the process of forming a portfolio, while implementing the main concepts we have learned throughout our course FIN4502.

You will be building an investment portfolio. You will hold it for 10 years. Your investment in 12/31/2018 will be $100,000. You will estimate the value of your investment in 10 years. Given that we are focusing on the analysis of the securities, we will not consider periodic (additional) savings during the life of your investment.

Both quantitative portion of this project (Answers in Excel) as well as the qualitative portion (Explaining each answer in the write-up) will be graded. Both portions are required to get full points on all the questions.

PART 1. RESEARCH:

Let’s consider the economic outlook. When making investment decisions, the most important factor of success is the knowledge of the economy, the trends, performance of industries, … Once you are acquainted with the overall picture, you are able to identify the asset classes, industries, or countries with the highest likelihood of success.

As a first step to this project, you are encouraged to read at least two of the reports below. Feel free to read them all if you want. You can only gain from doing so.

After carefully doing this research, please move forward to completing the following points/questions using the Excel Spreadsheet. Let’s begin by making sure you are in Excel “Sheet1 - Answers”. ***Please do not overwrite or input any data in the cells filled with gray. These cells are calculated automatically for your convenience.

***Questions 1 to 4 and 9 to 12 are completed in “Sheet1 – Answers”

Merrill Lynch - Capital Market Outlook https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/ME-cio-weekly-letter.pdf

Goldman Sachs – Global Economic Outlook 2019 https://www.goldmansachs.com/insights/pages/outlook-2019/global-outlook/report.pdf

Morgan Stanley – 2019 Global Outlook https://www.morganstanley.com/ideas/2019-global-macroeconomic-outlook

Citibank – 2019 Annual Outlook https://www.citibank.co.uk/static/documents/annual-outlook-report-2019.pdf

1. What is your stance regarding geographic regions / economies? a) Choose the weights (percentages) of your portfolio that should be allocated to each

geographic region and provide your rationale for doing so. (Only 3 regions or countries for simplicity. i.e. Europe, America and Asia or else USA, Germany and Japan)

b) Choose the weights (percentages) of your portfolio that should be allocated to emerging and to developed economies and provide your rationale for doing so.

c) Balance your allocation so that you accomplish both “a” and “b” objectives.

2. What industries do you expect to out(under)perform? [Answer after doing due diligence in respect to research (i.e. reading above reports)]. *Please make use of GIC Classification. GIC classifies stocks in 11 sectors. (You can read a bit more in the following link: https://www.fidelity.com/learning-center/trading- investing/markets-sectors/global-industry-classification-standard) a) Which industries will you include/exclude on your portfolio and why? b) Choose the weights (percentages) of your portfolio that should be allocated to the

industries that you do plan to include in it. c) Choose whether you will target to develop a portfolio that is representative of the market

(i.e. all sectors are included) or if you will opt to develop a specialized portfolio in specific sector(s). Explain your rationale. (***For the purposes of this project, you should include at least 5 sectors)

3. Choose between growth stocks and value stocks. You may opt for either of these categories or a mix. If you opt for a mix, please indicate the weights and your rationale. Additionally, make sure to choose at least one stock that pays dividend as you will need it in Question 12.

4. At this point we can start looking at individual stocks. For simplicity, you are encouraged to use Yahoo Equity Screener (https://finance.yahoo.com/screener/new/). Your challenge is to find stocks that meet the weights that you have stated in points 1 to 3 above. You should choose at least 11 stocks, hence if you opted for a portfolio including all sectors, you will have 1 stock per sector. ***Questions 5 to 8 are completed in “Sheet2 – Data”

PART 2. WORKING WITH DATA:

5. You have chosen 11 stocks in point 4. Let’s get the data now. First, please change to “Sheet2-

Data” in Excel and fill the data of the stocks’ prices from 12-2013 to 12-2018. You may download the price historical data from Yahoo Finance: Yahoo Finance -> Historical Data | Frequency -> Monthly | Time Period: One year of monthly data | Download data | Choose Adjusted Close Price. (i.e. the following link takes you to the historical data search for AAPL. Just input another ticker in the “Quote Lookup” field and the data of this company will show up https://finance.yahoo.com/quote/AAPL/history/). Please note the first column has a header stating “S&P 500 (Market)”. This is, besides your 11 stocks, you need to download the data of the market. You can use the ticker for S&P 500 as ^GPSC.

6. Calculate the expected return and the standard deviation returns for each stock and the market as well.

7. Since our data is monthly, we must annualize our expected return and standard deviation. 𝐴𝑛𝑛𝑢𝑎𝑙𝑖𝑧𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = (1 + 𝑚𝑜𝑛𝑡ℎ𝑙𝑦_𝑟𝑒𝑡𝑢𝑟𝑛)12 − 1 𝐴𝑛𝑛𝑢𝑎𝑙𝑖𝑧𝑒𝑑 𝑆𝑡 𝐷𝑒𝑣 = 𝑚𝑜𝑛𝑡ℎ𝑙𝑦_𝑠𝑡_𝑑𝑒𝑣 𝑥 √12

8. Calculate the Beta of each stock and the Beta of your portfolio. 9. Complete the (fields that are not in gray) table of the “Sheet3-Portfolio”. You will now have

an expected value of your investment in Year No. 10. It is important to remark this is an expectation and uncertainty will be higher the higher the risk you accepted.

***Let’s go back to “Sheet1-Answers” 10. For brevity, let’s focus on only 2 (two) of the 11 stocks. Please answer the following questions:

a) Are the company’s revenues tied to a single/few customer(s)? b) To what extent are the company’s revenues tied to a single/few product(s)? c) To what extent does the company rely on a single/few supplier(s)? d) What percentage of the company’s business is generated overseas? e) What is the competitive situation? f) What does the future have in store? g) What is the company’s legal and regulatory environment?

11. Please provide at least two of each category of the below ratios:

Liquidity: Can we make required payments as they fall due? Asset management: Do we have the right amount of assets for the level of sales? Debt management: Do we have the right mix of debt and equity? Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM,

ROE, and ROA? Market value: Do investors like what they see as reflected in P/E and M/B ratios?

12. Imagine you build a two-stock portfolio with equal weights (50% and 50%). Using the same

two stocks chosen above, calculate your portfolio (in overall) expected return and risk 13. Finally, keep only one of the two stocks. Using DDM and PE models, determine the

fundamental value of the stock and state if it is undervalued or overvalued.

Assumptions and Remarks:

* Both quantitative portion of this project (Answers in Excel) as well as the qualitative portion (Explaining each answer in the write-up) will be graded. Both portions are required to get full points on all the questions.

* You must show your calculations (Excel formulas) for Beta, Expected Return, Standard Deviation,... In other words, never plug the results from calculations directly in Excel. Use Excel Formulas.

* Assume a Long-Term Growth rate of 3% and a Risk-Free rate of 2%. You can change these assumptions if you want providing rationale in your paper.

* Please indicate your sources for all data if obtained from any (public – online) source other than Yahoo Finance as suggested.

* You may find data for Quarterly Dividends. However, use the total yearly Dividends when estimating the stock value using DDM (Dividend Discount Model).

* Consider returns of S&P500 as return of the market.