Investments
Spring 2018
Assignments
Your group will create an equity portfolio composed of 10 large firms that broadly reflect the economy. [Each firm must have at least one bond issue with a term remaining to maturity of 8 to 12 years.] Using the 10 equities you will create three different portfolios of $1 million. The fist portfolio will be weighted by the market values of the equities. The second will be weighted by price and the third will be an equally weighted portfolio. [See Section 2.4 of textbook.] You will also create a bond portfolio by selecting one bond issue from each of the 10 companies. These bonds will have maturity dates between 10 and 20 years from now. [Good site for this data is www.finra.org/marketdata] You will also select a US Treasury security with a maturity of 10 to 15 years. [Good site for this data is www.wsj.com. Click on Markets tab then on Bonds. Scroll down to a table on left side “Bond Market Overview”. At bottom of that table click on “See Full Daily Closing Prices”. That brings up data for all outstanding Treasuries by maturity date. Historical prices are also available.]
You will observe the performance of these securities for a year starting Feb. 1, 2017 and ending Jan. 31, 2018. You will record the actual closing prices (not the adjusted closing prices) for the equities on the first and last day as well as every Tuesday during the one year period. For the bonds, you will record the prices and yields to maturity on the same date as for the equity values. For the bonds, you will create and equally weighted portfolio, using a $1,000 face value bond for each. You will also keep track of the Dow Jones Industrial Average (DJIA)and the S&P 500 index on each of the observation dates.
You will analyze how your equity portfolios performed over the year. In particular, you will look at how they performed against the two benchmark indexes. You will compare and contrast this to your bond portfolio. You will also need to answer the following questions;
What are the weights for each stock in each portfolio on the starting date and on the ending date?
What are the weighted average betas of your 3 stock portfolios (using starting prices)?
What are the standard deviations of return for each stock and for the 3 portfolios.
What are the standard deviations of returns for the DJIA and S&P 500 over the year?
What is the holding period return (HPR) for each stock and for each portfolio?
What is the HPR for each bond and for the bond portfolio?
What ratings are assigned to each bond by the rating agencies?
How did the bond portfolio perform compared to the Treasury bond you tracked?
Would you say you were adequately compensated for your risk in the equity portfolio and in the bond portfolio?
Term Project Notes
Assume your portfolio consists of 4 equities, Alpha, Beta Gamma and Delta.
For the price weighted portfolio:
|
Alpha |
Beta |
Gamma |
Delta |
Total |
|
|
Stock price at 2/1/17 (a) |
$45.00 |
$53.85 |
$32.45 |
$87.50 |
$218.80 |
|
Share of Total Value (b) |
.2057 |
.2461 |
.1483 |
.3999 |
1.0000 |
|
Amount to be invested (c ) |
$205,700 |
$246,100 |
$148,300 |
$399,900 |
$1,000,000 |
|
# of shares (d) |
4,571 |
4,570 |
4,570 |
4,570 |
(b) for each stock, this is the stock price divided by the total in the last column
(c) for each stock, the number in the cell above (b) times $1 million
(d) for each stock (c) divided by (a)
For the equally weighted portfolio:
|
Alpha |
Beta |
Gamma |
Delta |
Total |
|
|
Stock price at 2/1/17 (a) |
$45.00 |
$53.85 |
$32.45 |
$87.50 |
|
|
Share of Total Value (b) |
.25 |
.25 |
.25 |
.25 |
1.0000 |
|
Amount to be invested (c) |
$250,000 |
$250,000 |
$250,000 |
$250,000 |
$1,000,000 |
|
# of shares (d) |
5,556 |
4,643 |
7,704 |
2,857 |
(b) for each stock, this is one quarter of the total investment
(c) for each stock, the number in the cell above (b) times $1 million
(d) for each stock (c) divided by (a)
For the market value weighted portfolio:
(Instead of calculating the market capitalization, you may use the one reported on the date you recorded the first stock price from the same source as your stock price.)
|
Alpha |
Beta |
Gamma |
Delta |
Total |
|
|
Stock price at 2/1/17 (a) |
$45.00 |
$53.85 |
$32.45 |
$87.50 |
|
|
No of shares (millions) (b) |
225 |
700 |
500 |
100 |
|
|
Market Capitalization ($, millions) (c) |
$10,125 |
37,695 |
16,225 |
8,750 |
72,795 |
|
Share of Total Market Cap. (d) |
0.139 |
0.518 |
0.223 |
0.120 |
1.000 |
|
Amount to be invested (e) |
$139,000 |
$518,000 |
$223,000 |
$120,000 |
$1,000,000 |
|
# of shares (f) |
3,089 |
9,619 |
6,872 |
1,371 |
(c) for each stock this is (a) x (b)
(d) for each stock, (c) divided by the total market capitalization displayed in the last column
(e) for each stock (d) x $1,000,000
(f) for each stock (e) / (a)
For the bond portfolio, you will select for each company one bond that matures in about 10 years ( 8 to 12 years). You will record the price and yield to maturity on the same dates you record the stock prices. For those dates you will also record the price and YTM for the 10 year Treasury bond. Those 10 year benchmark rates are widely available. The Wall Street Journal site is a good source of this data. If companies in your portfolio have no outstanding bonds, provide that information.
Holding period return in percent is:
[(Ending value – Beginning value + Distributions)/Beginning value]/100
For stocks, distributions are cash dividends paid. For bonds, distributions are coupon payments. Since you are holding the bond for one year, you would receive 2 coupon payments [equal to the coupon rate on the bond times the face value (use $1,000 for each)].