Project 1
Assume that you have $1,000,000. You will use this to form a hypothetical large-cap
(each with at least $10 Billion in Market Capitalization) diversified stock portfolio by
investing it in five stocks chosen from five different industries. Be sure to pick
companies that pay dividends. No short sales, fractional shares, or margin trades are
permitted. To determine how much you have invested in any particular stock, multiply
the stock price by the number of shares you buy. You must use at least $900,000. Any
funds left over will be held as cash, earning no interest. Dividends and other cash
distributions will be added to cash, not reinvested.
Trades are not permitted except in extraordinary situations, with my specific approval
beforehand. Trading will only be considered between Friday of Week 1 to Thursday of
Week 13, January 10 to April 9. Should I allow a trade, you need to notify me about the
exact trade you make within 24 hours by e-mail.
Deliverables:
1. Spreadsheet that includes the number of shares you purchased for each
stock and the closing prices as of the end of Week 2, January 31, of your
stocks. Report the last dividend paid date and amount as well as the
expected next ex-dividend and paid dates. Also, include your total investment
and the amount held in cash. To get stock price information, go to
www.google.com or www.yahoo.com and click on Finance. Enter the ticker
symbol of your stock and click on historical prices. Use the column that
contains closing prices.
2. Conduct an analysis of the stocks, telling me why you chose these particular
stocks based on your analysis. The analysis (3 to 6 pages plus spreadsheets)
should include the following:
3. a) Give a brief history of the companies and their products. Briefly discuss
where the company is heading (new products, ventures). Identify who each
companys competitors are and what each companys ranking is amongst its
competitors.
4. b) Find the reported beta and the adjusted beta of the companies. Report
your source and describe how they calculated the betas including frequency
of observations, as methods vary. Explain what the beta tells you about each
company.
Project Part 2. Valuation of your portfolio and companies (and reevaluation based on any
changes you have made in your portfolio).
Deliverable:
1. Calculate historical beta and adjusted beta for each stock in your portfolio and
the portfolio as a whole, based on the data for 5 years, 3 years and 1 year
prior to January 31, 2021.
2. Using the stocks in your initial portfolio, prepare a valuation of each stock and
the initial portfolio using zero, constant or variable growth models with a
market return at 8% and at 12%. [Note that the growth rate must be less than
the required rate of return.] Make sure you list the date of the valuation and
the closing share price of your firms stock. Each firms required rate of return
will depend on its beta.
3. Is the stock of each of these companies over or undervalued?
4. What is the expected return using the CAPM model?
5. Map risk-returns relationships for 1 year and 3 year returns to each stock and
your portfolio, relative to the benchmark (S&P 500) returns.
