Students will construct a well-diversified portfolio using an initial investment
ID: 2782623 • Letter: S
Question
Students will construct a well-diversified portfolio using an initial investment stake of $50,000 (the portfolio should use at least 95% of the initial investment, but they may not use more than $50,000). Students may include stocks, common or preferred; bonds, corporate or U.S. Treasury bonds; mutual funds, and futures contracts, or options. Students will use the closing prices from the first day of the class to determine the price of each issue. Only whole lots of any issues may be acquired; that is, no less than 100 shares of common or preferred stock, no less than five corporate bonds or $10,000 for U.S. Treasury Bonds, no fewer than the minimum required investment for any mutual fund, and no fewer than five contracts for any option or futures position. The settlement date will be the first day of Week Three. Students do not have to use all of the above mentioned securities, but they must use more than one class of security. Transaction costs are ignored in the creation of the portfolio.
For the Final Project, students will write a paper that:
Explains their investment strategy, including an assessment of their willingness to bear risk.
Describes the securities in the portfolio, including a description of the historical information for each firm.
Calculates a quarterly and annualized return on the portfolio, and the expected return for the portfolio (students may use the closing prices as of December 31st of last year).
Computes the beta of the portfolio (MERGENT, in the Ashford Online Library, can be used to find the historical betas of each security) using concepts learned within the course.
Summarizes the risks of their portfolio and determines any areas where they might consider reinvesting portions of their portfolio to achieve either less risk or higher expected return.
The Final Project:
Must be eight to ten double-spaced pages in length
Explanation / Answer
KR- PURCHASE PRICE on 12/31/2014 $64.21,
Price on 03/31/2015 $76.66
May 1, 2015 $70.13
PURCHASED 155 SHARES
beta .79/10%= .079
20% of portfolio
YHOO- PURCHASE PRICE ON 12/31/2014 $50.51,
PRICE ON March 31, 2015 $44.44
May 1, 2015 $42.51
PURCHASED 197 SHARES
Beta- 1.1/10%= .11
20% of portfolio
BAC- PURCHASE PRICE ON 12/31/2014 $17.89,
Price on March 31, 2015 $15.39
Price on 05/01/2015 $16.11 PURCHASED
558 SHARES
beta 1.63/10%= .163
20% of portfolio
ORCL- PURCHASE PRICE ON 12/31/2014 $44.97
Price on May 1, 2015 $44.37
Price on March 31, 2015- $43.15
PURCHASED 222 SHARES
beta 1.42/10%= .142
20% of portfolio
SBUX- PURCHASE PRICE ON Dec 31, 2014 $41.02
Price on March 31, 2015 $47.35
Price on May 1, 2015- $50.29
PURCHASED 243 SHARES
beta .77/10%- .077
20% of portfolio
QUARTERLY RETURN ON PORTFOLIO
Kr- $76.66- $64.21=$12.45 X 155 shares= $1929.75 19.29% quarterly return on investment
YHOO- $44.44-$50.51= $-6.07 X 197 SHARES= -$1,195.79 -11.95% quarterly loss on investment
BAC- $17.89- $15.39= $2.50 X 558 shares=-$1,395 -13.95% quarterly loss on investment
ORCL- $44.97-$43.15=- $1.8 X 222=- $404.04 -4.04% quarterly loss on investment
SBUX- $41.02- $47.35= $6.33 X 243 SHARES= $1,538.19 15.38% quarterly return on investment
Average quarterly portfolio performance
NET GAIN/LOSS- $473.11 GAIN. .09% GAIN FOR Q1
Overall I feel my portfolio has a well balance of high and low risk stocks based on their betas. Bank Of America tends to be one of my most volatile stocks that I own which has created significant gains for me. The financial industry today has a lot of uncertain factors that can dictate which direction our economy will move. This creates uneasiness for investors to invest in financial stocks particularly with high betas such as Bank of America. I hope to mitigate some of that risk by selling 50% of my shares with Bank of America, and purchase more of Kr, as it has one of the lowest betas in my portfolio which indicates stability and lack of fluctuation.
there are always pros and cons when deciding anything—but, when a person is constructing a portfolio—there is no way to minimize the amount of thought process that is being put into it. So much is involved in the process; and one can either gain or lose so much within a short period of time. A well-diversified portfolio is a portfolio that the firm-specific component of risk is negligible. Due to the fact that firm-specific risk can be diversified, investors cannot expect to be compensated; the only time that they should is when dealing with systematic risk; because that risk should impact expected returns.
When dealing with money to invest; many go at this in a way to see how they can maximize their investments at the end. Strike price is defined as “the price at which a specific derivative contract can be exercised.” However, strike price is mostly used to describe “stock and index options, in which strike prices are fixed in the contract.
When considering a company to invest money in—one always looks at the amount per share that the company is going for. When discussing, Miller-Moore Equine Enterprises (MMEE) – the amount per share is extremely important. With the above question, the MMEE is being sold at $40 per share. A call option is defined as: “an option contract in which the holder (buyer) has the right (but not the obligation) to buy a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).
When dealing with a diversified portfolio—one should have roughly 25 stocks or more within that portfolio. Based on studies of historical data, with 25 stocks you diversify away about 82% of risk unique to each stock which is pretty good. Some stocks are not spelled out exactly what they are – the stocks can be within multiple industries and be in subcategories within a sector. Because of this, there are many avenues to go about when dealing with a diversified portfolio. By doing this, one has the advantage of owning multiple stocks that are similar to another stock. A good example is the financial sector. There are many credit cards out there that are interchangeable with one another. For example, American Express (AXP) is a subcategory industry to credit services; and along with this is Visa, Mastercard, Discover, etc – since these are all so similar it can be permissible for one to own multiple stocks within the subcategory.
A diversified portfolio can help in numerous ways. For example, a diversified portfolio can help manage risk, can avoid costly mistakes by adopting a risk level a person can deal with, and rebalancing is a key to maintaining risk levels over time. One should contemplate setting a long-term mix of stocks, bonds and other investments that correlates to their goals. By doing this, one should constantly check the risk and keep track of their finances. Diversification wont boost performance or guarantee one not to get any losses; but diversification can provide the potential to improve the returns based on the risk. When dealing with my diversified portfolio, I am definitely willing to take risk. I feel that if I do not take risk then I will always think, “what if”. The best thing with creating a diversified portfolio is that there are many possibilities to look at, and if one isn’t going in the direction that I would have anticipated—I can still be hopeful that the other stocks and investments I have will be going in an upward manner.
Investment Securities are those that are “purchased in order to be held for investment.” Investment securities are held by banks and are usually one of two main sources of revenue along with loans.
I chose these particular stocks as there industries have very little to do with each other. I chose industries such as food distribution, internet companies, financial institutions, software, and recreational industries to ensure that there is a diversification of not just companies but industries. This creates stability to a certain degree within a portfolio especially when one aspect of the economy is declining, having stocks in other industries can offset potential losses for the declining stock.
“At Yahoo Finance, one is able to get free stock quotes, up to date news, portfolio management resources, international market data, message boards, and mortgage rates.” This type of information is very vital and key to those that are interested in this stock. They are able to gather up all the necessary information needed in order to guarantee all the information that they have / need on the stock is up to date and they are able to access the trends in which the stock has been adjusted.
Bank of America is one of the world's largest financial institutions, serving multiple clients, whether they be: “individual consumers, small- and middle-market businesses and large corporations with a full range of banking, investing, asset management and or their financial and risk management products and services.
. Bank of America is among the world's leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world
Oracle Corporation provides enterprise software and computer hardware products as well as many more services. The company offers many databases and software programs to create a network service that works for many users
Oracle offers “database and middleware software, application software, cloud infrastructure, hardware systems including computer server, storage and networking products, and related services.” Oracle operates through multiple avenues which include, software licenses, subscriptions, and services for many different licenses. Each of which provide something new and unique to the consumers, thus putting them at a competitive edge.
Starbucks Corporation is a marketer and retailer of specialty coffee throughout the world and operating in multiple countries. The company purchases multiple types of coffee’s and teas, some of which are high-quality and they also provide food and beverage items. Starbucks Corporation provides multiple brands for those looking for brand name tea / coffee. The company has many operating segments throughout the world.