Making a report to your investment committee

Paper instructions

For this Part, you will be making a report to your investment committee that discusses and summarizes the performance of your stock portfolio. Use closing prices as of August 5, to calculate your returns. What is the final market value of your portfolio (including dividends received and added to non-interest earning cash)? If the final market value of your portfolio is less than $1,000,000, your portfolio lost money

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Discipline: investment
Stock Portfolio Project Part 4

For this Part, you will be making a report to your investment committee that discusses and summarizes the performance of your stock portfolio. Use closing prices as of Friday of Week 13, August 7, to calculate your returns. What is the final market value of your portfolio (including dividends received and added to non-interest earning cash)? If the final market value of your portfolio is less than $1,000,000, your portfolio lost money.

Provide a graph of the daily stock prices (high, low, and closing) for each of your stocks. Include the volume on each graph, with the scale shown on the right side of the graph. Be sure to label the graphs!

Provide a graph of the value of your portfolio and the value of the closing S&P 500 if $1,000,000 were invested in that initially. This is the normalized value. By normalized, you have scaled the
S&P 500 closing prices so that its price on the first day ($1,000,000) is the same as the portfolio’s closing price on that first day.
In the final section of your report, recommend for or against the inclusion of each of these stocks in the portfolio and defend your recommendation. Use the information you have obtained in Part 1 Deliverable 2 to support your argument.

Calculations: Use the closing price of your stocks on Friday of Week 13, August 7, to calculate your returns.

  1. Report the “purchase” and “sale” price of your stocks from the beginning and end of the semester along with any dividends you might have received. Calculate the buy-and-hold return of each stock [(MVend – MVbeginning + DIV) / MVbeginning] and the buy-and-hold return on your portfolio.
  2. Determine the final market value of your portfolio (including dividends received). If the final market value of your portfolio is less than $1,000,000, your investment lost money.
    1. Calculate the market value of
      a. Your portfolio for each day (including cash). I suggest that you do this by adding up the daily closing market values of your assets held and the cash you hold, including the total dividends received up to date.
      b. The S&P 500 index portfolio over this same period assuming you keep the same amount in cash. We are using the S&P 500 index as our proxy for the market.
    2. Plot the daily market value of your portfolio and the daily market value of the S&P 500 using your calculations in #3.
    3. Using the market values you calculated in #3, calculate the daily returns (percent) for a. your portfolio
      b. The S&P 500 index portfolio.
    4. Using your calculations in #5, calculate a. The average daily return and the standard deviation of daily returns for both the S&P 500 index and your portfolio.
      b. your portfolio’s beta by calculating the covariance of your portfolio’s daily returns with the S&P 500’s daily returns and dividing that by the variance of the S&P 500.

Write-up: Assume that you are preparing a relatively short report (maximum of 10 pages double-spaced) for your investment committee. You will be graded on the quality of your writing as well as the quality of your analysis. Do not simply answer the following questions – this should be financial report! These questions are intended to provide guidance.

  1. Introduction
  2. Comment on the individual and portfolio returns and on any information/events (market-wide or firm-specific) that may have contributed to the performance of your stocks. Describe and explain any trades you made. (Suggested length: a short, concise paragraph for each stock).
  3. From your calculations, if you held the S&P 500 instead of your stocks, how much money would you have ended up with? Would you have been better or worse off to hold the index? Analyze the reasons for any differences.
  4. Based on your calculations for standard deviation and beta, how risky was your portfolio compared to the index? Again, analyze the causes of the differences.
  5. Finally, what are your plans going forward? That is, if this class continued and you had the chance to alter your portfolio holdings now, would you choose to sell any of your stocks or would you want to keep holding them? What will you tell the investment committee? Be explicit.

Deliverables:

  1. Your report (8 - 10 pages double-spaced, 12 pt. font) plus graphs.
  2. Spreadsheet of returns and calculations, and market value plot – 2-pages maximum – make it neat and readable.

Table 1. Stock Value and Beta as of 17 June 2020

Company Symbol Number of shares Price as of 08-May-20 Total investment Beta Price as of 17-June-20 Value of investment on 17-June
Activision Blizzard ATVI 2000 $73.14 $146,280.00 0.6 73 $146,000.00
Apple AAPL 1200 $310.13 $372,156.00 1.17 352.08 $422,496.00
Chevron Corporation CVX 3000 $95.47 $286,410.00 1.3 94.03 $282,090.00
Starbucks SBUX 1000 $77.87 $77,870.00 0.8 77.84 $77,840.00
Delta DAL 2000 $22.72 $45,440.00 1.24 31.3 $62,600.00
Cash position $71,844.00 $71,844.00
Total $1,000,000.00 $1,062,870.00

Table 2. Portfolio Beta
Portfolio Beta A B AxB
Company Number of shares Weighting Beta
Activision Blizzard 2000 0.22 0.6 0.130434783
Apple 1200 0.13 1.17 0.152608696
Chevron Corporation 3000 0.33 1.3 0.423913043
Starbucks 1000 0.11 0.8 0.086956522
Delta 2000 0.22 1.24 0.269565217

Total 9200
Portfolio beta 1.063478261
Financial data for 2018 and 2019, for each of the five companies, will be used in the calculations.
Expected Return Using Capital Asset Pricing Model (CAPM)
• To calculating expected return using the CAPM, the formula is given by Rs = rf+(b(rm-rf)), where Rs is the expected return on the specific stock, Rf is the risk free rate (taken as the U.S. treasury bill rate), b is beta coefficient for the specific stock, and Rm is the market return. • rf (the risk free rate/the U.S. Treasury bill rate as of June 17, 2020) = (0.18%). • Rm = 8% or 12%. • b= beta of investment Table 3. Cost of Capital Calculation for the Five Companies Company Rf Beta (B) Required rate of Return when the market rate (Rm) is 12% Rf+(B(Rm-Rf) Required rate of Return when the market rate (Rm) is 8% Rf+(B*(Rm-Rf)
Activision Blizzard 0.18 0.6 7.27 4.87
Apple 0.18 1.17 2.31 9.33
Chevron Corporation 0.18 1.3 7.27 10.35
Starbucks 0.18 0.8 2.31 6.44
Delta 0.18 1.24 7.27 9.88
Table 4. Zero Growth Model
Under the zero growth model, it is assumed that for each of the five stocks, dividend will not grow. Accordingly, the present value of a particular stock (with zero growth) is calculated by dividing dividends per period by the required rate of return per period. Therefore, V = Dividend/ r, where V is the value of the stock and r is the required return/ cost of capital. For each of the five companies, the dividend paid in the 2019 fiscal year is used.

Company Dividend for 2019 Cost of capital when market rate is 12% Cost of capital when market rate is 8% Value of share when cost of capital is 12% Value of share when cost of capital is 8% Actual Price Market Overvalued/Undervalued
Activision Blizzard 0.37 7.27 4.87 5.09 7.59 73 Overpriced
Apple 3.04 2.31 9.33 131.74 32.59 352.08 Overpriced
Chevron Corporation 4.76 7.27 10.35 65.46 46.01 94.03 Overpriced
Starbucks 1.49 2.31 6.44 64.57 23.15 77.84 Overpriced
Delta 1.51 7.27 9.88 20.76 15.29 31.3 Overpriced

Constant Growth Model
Under the constant growth model, the key assumption is that each of the five companies’ dividends will grow at a constant growth rate. Using this assumption, it is possible to determine the fair price/value of a stock today based on its future dividend payments. The formula used under the constant growth model is P = D/(r-g), where P is the current value or price of the stock, D refers to the next year dividend the company will pay, r represents the required rate of return, while g represents the dividend growth rate, which must be less than normal r. The g is calculated as follows:
Table 5. Growth Rate (g) Calculation
Company 2019 Dividend 2018 Dividend Difference Growth rate (g)
Activision Blizzard $0.37 $0.34 $0.03 8.82%
Apple $3.04 $2.82 $0.22 7.80%
Chevron Corporation $4.76 $4.48 $0.28 6.25%
Starbucks $1.49 $1.32 $0.17 12.88%
Delta $1.51 $1.31 $0.20 15.27%

Table 6. Constant Growth Model
Company Dividend for 2019 Cost of capital when market rate is 12% Cost of capital when market rate is 8% Growth rate Value of share when cost of capital is 12% Actual Price Market overvalued/undervalued Value of share when cost of capital is 8% Actual Price market overvalued/undervalued
Activision Blizzard 0.37 14.40% 12.00% 8.82% 6.64 73 Overpriced 11.65 73 Overpriced
Apple 3.04 10.98% 6.30% 7.80% 95.64 352.08 Overpriced 48.25 352.08 Overpriced
Chevron Corporation 4.76 10.20% 5.00% 6.25% 120.51 94.03 Underpriced 95.2 94.03 Overpriced
Starbucks 1.49 13.20% 10.00% 12.89% 46.56 77.84 Overpriced 14.9 77.84 Overpriced
Delta 1.51 10.56% 5.60% 15.27% 13.30 31.3 Underpriced 26.96 31.3 Overpriced
At 12%, the growth rate is lower than the required rate of return for all companies in the portfolio except Delta. However, at 8%, rate of return, only ATVI’s rate of return is greater than its growth rate (see table 6). Therefore, the zero growth model is used for AAPL, CVX, SBUX, and DAL at 8% required rate of return and for DAL at 12%.
Time Series Ratio Analysis
Liquidity Ratio
Table 7. Current Ratio
2019 2018 2017 2016
ATVI 2.50 2.31 1.78 1.82
AAPL 1.54 1.13 1.28 1.35
CVX 1.07 1.25 1.03 0.93
SBUX 0.92 2.20 1.25 1.05
DAL 0.41 0.34 0.41 0.49
• Based on the current ratio figures, from 2017, ATVI, AAPL, and CVX could cover their current liabilities using their current assets (current ratio >1).
• SBUX could cover its current liabilities using its current assets in 2017 and 2018, but not in 2019.
• However, DAL’s current assets have been insufficient to cover its short-term debt throughout the period (see table 7).
Activity Ratio
Table 8. Total Asset Turnover
2019 2018 2017 2016
ATVI 0.33 0.42 0.38 0.38
AAPL 0.77 0.73 0.61 0.67
CVX 0.59 0.63 0.53 0.42
SBUX 1.38 1.02 1.56 1.49
DAL 0.73 0.74 0.77 0.77

• Other than SBUX, all the other companies have recorded a total asset turnover ratio of less than one throughout the review period (see table 8).
• However, for all the companies, the ratio has remained relatively stable over the period.
Debt Ratio
Table 9. Debt to Assets
2019 2018 2017 2016
ATVI 28.00% 24.00% 15.00% 13.00%
AAPL 23.00% 26.00% 26.00% 27.00%
CVX 10.00% 11.00% 13.00% 14.00%
SBUX 22.00% 27.00% 38.00% 58.00%
DAL 14.00% 14.00% 12.00% 12.00%
• As of 2019, ATVI, AAPL, and SBUX respectively use more debt to finance their assets. On the other hand, CVX and DAL use less debt to finance their assets.
• From 2016, SBUX has reduced the use of debt in its capital structure, while ATVI has increased the use of debt to finance its assets (see Table 9).
Profitability Ratio
Table 10. Gross Profit margin
2019 2018 2017 2016
ATVI 67.73% 66.44% 64.36% 63.77%
AAPL 37.82% 38.34% 38.47% 39.08%
CVX 42.85% 40.45% 43.79% 46.34%
SBUX 28.25% 29.74% 59.63% 60.07%
DAL 55.04% 52.32% 55.92% 56.12%
• Other than SBUX, the other companies in the portfolio have recorded relatively stable profitability over the review period.
• SBUX’s profitability declined significantly in 2019 relative to 2016 (see Table 10).

Key Events
Various events during the period may have caused prices for stocks in the portfolio to either increase or decrease. The first factors is dividend announcement. All the five companies have announced dividends in the past two years. Announcement of dividends that are up to or exceed investors’ expectations lead to an increase in a company’s stock price. However, if investors expect a higher dividend than what is announced, share price declines. Secondly, fluctuations in demand and supply can cause share prices to increase or decrease. For instance, the current COVID-19 pandemic has undermined demand from different sectors of the U.S. economy and therefore, affected most stocks, including DAL and SBUX. Thirdly, interest rates have also played a role in the increase or decrease in stock prices. When interest rates are low, investors can easily access funds, resulting in increased demand for stocks and an increase in share prices. On the other hand, higher interest rates discourage borrowing and reduce both the demand and prices for shares.

References

Apple. (n.d.). Retrieved June, 2020, from https://www.apple.com/
HTMW. “Price History.” How the Market Works, 2020, https://www.howthemarketworks.com/quotes/quotes?symbol=.
Investing. “Financials.” Investing.com, 2020, https://www.investing.com/equities/.
Streetinsider. “Dividend History.” Streetinsider.com, 2020, https://www.streetinsider.com/dividend_history.php?q.

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