1 McNEESE COLLEGE OF BUSINESS FIN 630: INVESTMENT AND SECURITY ANALYSIS SPRING 2021 PORTFOLIO PROJECT _____________________________________________________________________________________ In fulfilling one of FIN 630 course requirements, each student will complete by April 25, 2020 an investment project on either portfolio construction or investment research. This handout contains guidelines for the portfolio construction project. According to this project, the student will be entrusted with the task of selecting and managing a threestock portfolio with a total amount of hypothetical funds of
1 McNEESE COLLEGE OF BUSINESS FIN 630: INVESTMENT AND SECURITY ANALYSIS SPRING 2021 PORTFOLIO PROJECT _____________________________________________________________________________________ In fulfilling one of FIN 630 course requirements, each student will complete by April 25, 2020 an investment project on either portfolio construction or investment research. This handout contains guidelines for the portfolio construction project. According to this project, the student will be entrusted with the task of selecting and managing a threestock portfolio with a total amount of hypothetical funds of $6,500,000. To carry out this task, please read the textbook chapter 12 which would help student assess the national and international security market, select the specific industries, and select specific securities. In addition, student will evaluate the performance of individual securities and the whole portfolio, and finally analyze your findings contained in performance evaluation section VI below. The project should contain the following sections: I. Introduction Purpose: here student would summarize educational purpose of the project and give a summary of the project and its results. Goal: Here you would state whether you plan to outperform the market or perform like the market as measured by a market index (S&P 500 Stock Index, The Dow, etc.) II. Investors Objectives Risk aversion: Here you would state how much tolerant you are in terms of taking risk. Are you risk averse or willing to take more risk in your investment? Your attitude towards risk help you pick the stocks with the appropriate risk, using measures of risk (beta and standard deviation). Income vs. growth: Do you prefer to receive income (stock dividends) or you would rather invest in growth stocks which would appreciate in value in the long run. Your preference help you pick the appropriate stocks. Asset allocation and diversification: Here you would decide on the percentage you invested in one of the three stocks. You could decide whether you want to invest equally in each stock. III. Economic Assessment (Use Chapter 12) Here you will include your own assessment of your expectation for the future of the security market conditions. The assessment is made in the light of the direction of the national and international economies, and it is undertaken by identifying signals given by economic indicators published periodically by the financial media. IV. Industry Outlook (Use Chapter 12) Here you would highlight the most promising industries. Make sure to elaborate on the fundamental that led you to believe that they would be doing well during your future investment horizon. 2 V. Company Analysis This section is made up of two parts. In the first part, you would rely on your Objectives and your conclusions in the Industry Analysis to help you pick and profile your specific securities in the portfolio. In the first part, you would rationalize your selection by reporting here some fundamental measures such as stock's: Price-to-earning (P/E) ratio PEG ratio Price-to-book ratio Price-to-sales ratio Dividend yield Beta Market share Sources of Information: You may visit many relevant finance websites to get the data on those stocks you picked. References should be cited in the text, below the tables, and in a separate References section at the end of your final report. VI. Performance Measurement/Evaluation Here student would follow the following steps: Step 1. Prepare a spreadsheet for each stock with the following information: Record the weekly closing prices of the stock, and dividends received. Record the weekly closing values of stock market index (Standard & Poors 500 Stock index). Calculate the weekly return of the stock (ri) Calculate the weekly return of the stock market (rm) At the end of the semester, use regression technique to estimate stocks beta. (see the attached regression Summary Output At the end of the semester, calculate the holding-period return and standard deviation of the stock. Prepare a spreadsheet for stock A (use the same format for stocks B, C, D, E) Weekly recording Stock weekly price (P) Weekly stock return (ri) Market index reported Market weekly return (rm) 1 2 3 4 5 6 7 8 9 10 Average return of stock A x x Standard deviation of stock A Beta of stock A3 Example on Regression Printout using Excel SUMMARY OUTPUT Regression Statistics Multiple R 0.7369941 R Square 0.5431603 Adjusted R Square 0.3908804 Standard Error 0.0218641 Observations 5 ANOVA df SS MS F Significanc e F Regression 1 0.0017051 0.001705 1 3.566855 2 0.1553673 Residual 3 0.0014341 0.000478 Total 4 0.0031392 Coefficient s Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 0.0583333 0.0218641 2.668001 2 0.075819 4 -0.0112479 0.127914 5 – 0.011247 9 0.127914 5 X Variable 1 -1.5388889 0.8148253 -1.888612 0.155367 3 -4.1320268 1.054249 – 4.132026 8 1.054249 Step 2. Prepare a spreadsheet for the whole portfolio with the following information: Calculate the weekly return of each stock with its weights. Calculate the weighted average weekly return of the portfolio . Calculate the weekly return of the market. Use regression to estimate the portfolio's beta Use regression to estimate Jensen's alpha (regress the portfolio's excess return on market's excess return. Excess return means the return in excess of risk-free rate). Prepare a spreadsheet for the portfolio Weekly recording Weekly stock return Stocks weights Weighted weekly Market weekly4 (ri) return of stock return (rm) 1 2 3 4 5 6 7 8 9 10 Average return x x Standard deviation x x Portfolios Beta Step 3. Report the following performance measures: Semester's return of the portfolio (rp) Semester's standard deviation of the portfolio (_P) Semester's return of the market Semester's standard deviation of the market Beta of the portfolio Sharpe's performance measure of the portfolio (Sharpes Ratio) Sharpe's performance measure of the market (Sharpes Ratio) Treynor's performance measure of the portfolio (Treynor's Ratio) Treynor's performance measure of the market (Treynors Ratio) Jensen's performance measure of the portfolio (Alpha) Prepare a spreadsheet with the following data points: Data item Value Comments Semester's return of the portfolio Report the single value Semester's standard deviation of the portfolio Report the single value Semester's return of the market Report the single value Semester's standard deviation of the market Report the single value Beta of the portfolio Report the single value Sharpe's performance measure of the portfolio (Sharpe Ratio) Show the formula with the given values Sharpe's performance measure of the market (Sharpe Ratio) Show the formula with the given values Treynor's performance measure of the portfolio (Treynor's Ratio) Show the formula with the given values Treynor's performance measure of the market (Treynors Ratio) Show the formula with the given values5 Jensen's performance measure of the portfolio (Alpha) Show the formula with the given values Example on Jensens Alpha using Regression based on Excel Jensen's Alpha Y X Return of Return of Risk-free Return of Return of Portfolio, rpt Market, rmt rft Portfolio Market Minus Minus rpt – rft rmt – rft 0.1 0.06 0.03 0.07 0.03 0.13 0.07 0.04 0.09 0.03 0.15 0.05 0.04 0.11 0.01 0.11 0.1 0.04 0.07 0.06 Mean 0.1225 0.07 0.0375 0.085 0.0325 SUMMARY OUTPUT Regression Statistics Multiple R 0.993 R Square 0.987 Adjusted R Square 0.974 Standard Error 0.0032 Observations 3 ANOVA df SS MS F Significance F Regression 1 0.00079 0.00079 75 0.0732 Residual 1 0.00001 0.00001 Total 2 0.00080 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 0.116 0.004 32.58 0.02 0.07 0.16 0.03 -0.79 0.091 -8.66 0.07 -1.95 0.37 Alpha= 0.111 (average rp -average rf) -beta(average rm – average rf)6 (.1225-.0375) + 0.79 (0.07 – .0375) 0.085 0.0257 0.1107 VII. Analysis of Performance Evaluation and Conclusions This is a very important section. Here you will analyze the statistical results in the preceding section on performance evaluation Specifically, find out whether or not your own portfolio has outperformed the market in terms of return/risk. Then explain the fundamental reasons, taking into account the following: prevailing conditions in international markets, national economy, industry, and the specific companies. You may recall that you started your project by using the top-down approach to decide on bull/bear market and your specific security picks. Therefore it is imperative to use the topdown approach in explaining the performance results. VIII. References/Plagiarism It is important to cite information sources you used in your portfolio project research. Sources of information should be acknowledged in footnotes or in the text and the References section of the completed project. Plagiarism is unethical and illegal. Instructor will check for plagiarism using the website: www.turnitin.com/ which is posted on Moodle. IX. Notes on Style/Format Please make sure to paginate; assign numbers and titles to statistical tables, figures, exhibits, and appendices. Further, please make sure that you have run a computer spell-check before submitting your completed project to the instructor. X. Grading Sheet This portfolio project guidelines will help students undertake the project, which should reflect the accumulated investment management knowledge acquired by students during the semester. It is important that the write-up of the project incorporates knowledge of fundamental investment concepts, analyses and strategies. The scope of coverage and depth of analysis are also very important considerations. The project should be professionally prepared in terms of writing style and format. The portfolio construction project will be divided into sections whose contents will be graded based on the following: Introduction/Objectives (maximum of one page) 20 points Market Assessment: International/National (maximum of three pages, double space) 50 points Industry Analysis (maximum of two pages, double space) 30points Security Selection and Profiles (maximum of five pages, double space) 60 points Performance Measurement (no limit) 150 points Performance Analysis (maximum of two pages, double space) 50 points References and Writing Style/Format 30 points Total Possible Points 390 point
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