Investment Analysis
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Investment Analysis and Portfolio Management
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Investment Analysis and Portfolio Management
Question 1.
Consider three investors.
1. Bryant is a 25-year-old young professional working in a large city in the Northeast. since
joining
Three years ago, he put as much money as he could into his retirement account, which was
invested in a variety of index funds. A big fan of Benjamin Graham's "The Intelligent
Investor," he decided to consider some individual stocks of stable companies with good
long-term prospects and great management.
2. Nicole is 52 years old and retired from her high-paying job a few months ago after saving
aggressively and investing prudently for most of her life. While she can go back to work if
necessary, she prefers her financial independence. To maintain a steady cash flow, her
portfolio is heavily geared toward high-yielding stocks, allowing her and her family to live
off dividends most of the time. Aware of GE's downturn and their dividend cuts, she
focused on companies that she expected to see solid dividend growth.
3. Peter is in his thirties. He hadn't started a high-paying job until two years ago, and as a
result, he didn't have enough retirement savings. To make up for lost time, he is making
contributions to an individual retirement account (IRA) invested in market ETFs. In
addition, he will set aside $10,000 per year for the next ten years in high-risk, high-growth
investments.
3
Follow up our in-class group exercise to discuss whether shares of Amazon (AMZN), Target
(TGT), General Motors (GM) and Tesla (TSLA) are good investments for these three
investors.
Explain why you can or why you can't.
Solution 1
Amazon (AMZN) is an attractive investment for long-term/high-growth prospects since it
has established a set of fast-growing and highly profitable products. Additionally, the e-
commerce company is proficient in providing unique experiences to its customers hence creating
loyalty. However, Amazon does not pay dividends to its stockholders.
Target (TGT) is a favorable value stock to invest in following its strong financial base.
Additionally, it has secure quarterly dividends, which have constantly increased over the years.
However, I cannot buy Target stock now since it would be considered expensive – it is trading at
a higher price-to-earnings ratio compared to the industry’s ratio (Yahoo Finance, 2023).
General Motors (GM) is not a good choice following its underperformance in growth in
the previous years. It has delivered solid revenues but its annual dividends yield has remained
below the industry's average yield.
Tesla's (TSLA) management and commitment to launching new innovative products in
the future make the stock a favorable choice for long-term investment. It is a high-growth
investment since it is expected that the stock will be bullish in the better part of 2023 to
compensate for the bearish pattern in 2022. However, Tesla does not offer dividends to its
stockholders.
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Nicole should consider investing in Target due to constant dividend. Bryant and Peter
should invest in Amazon and Tesla, respectively.
Question 2.
Next week, we'll start a stock market game. You'll get $100,000 in equity, and you can
borrow up to an additional $100,000 in security deposit. Write a report (400-500 words)
describing your investment philosophy.
Discuss how you want to allocate your money among asset classes (bonds, stocks, and
countries) and the reasons behind your allocation. If you intend to invest in specific
companies, please describe how you selected your securities. The report should describe
your investment objectives and the strategies you have adopted to achieve them.
To do this, be sure to detail the following points:
· Divide investments into growth vs. value stocks or small vs. large companies.
Explain
‧
your risk management, for example, how your portfolio is hedged against the market
Economic downturn?
Solution 2
The portfolio allocation in this simulation was based on the investor's observation and
experience about the companies that offer these investment assets and the relevant beliefs about
future performance. However, the set of assets selected have different weights to ensure that
when the assets are combined, they provide a tradeoff between the associated risk and expected
return on investment (Galankashi et al., 2020). Consequently, the investment objective of
5
achieving maximum return on investment and minimizing the involved risk will be achieved.
The available equity was allocated based on the criteria below;
a.
Growth Stocks
Growth stocks were allocated 40 percent of the equity, which is $40,000. They include;
Amazon.com Inc. (AMZN) – Amazon is an attractive investment for long-term prospects.
This is evident from the recent growth rate where Amazon has increased its 3-year net income by
80 percent and annual revenue by 21.7 percent in 2021 (Macrotrends, 2023).
Tesla (TSLA) – In the long term, Tesla is a favorable bet following its commitment to the
plan to launch new products like the Roadster, Semi, and Cybertruck in 2023. In addition, Tesla
will release a robotaxi, which does not need any human involvement in 2024 (Ebiefung, 2023).
b.
Value Stocks
Value stocks are majorly associated with cheap valuations, where investors consider them
undervalued relative to their earnings and potential long-term growth. Most often these stocks
are from established and mature companies that have steady growth rates but not as fast as
growth stocks. The value stocks were allocated 60 percent of the equity and include;
Qualcomm Incorporated (QCOM) – The stock is trading below its 52-week high although
it trended downwards in the larger part of 2022. However, Merill (2022) states that Qualcomm's
price-to-earnings-growth ratio stands at 0.93x, which is significantly lower than the median of
the semiconductor equipment industry at 1.51x meaning that it is undervalued.
Walt Disney Company (DIS) – Disney is fairly valued with a price-to-earnings-growth
ratio of 1.56x and a price-to-earnings ratio of 58.23x (Merrill, 2022). However, it is safe since it
6
is among the best stocks in the entertainment industry, which means that it deserves a higher
valuation.
Ford Motor Company (F) – Ford, a leading automobile manufacturer is undervalued and
is trading at an attractive valuation point for investors. Its price-to-earnings ratio is at 4.35x,
which is below the automobile industry median of 8.76x (Merrill, 2022).
Risk Management
The growth stocks are highly volatile, associated with significant risks, and hence
received a lower equity allocation of $40,000. Conversely, value stocks are safe and hence
received a higher equity allocation of 60 percent. The risk was managed aversely where only 2.5
percent of each stock allocation was risked, which means that each stock would carry a loss of
$2,500 in case of an economic downturn.
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References
Galankashi, M., Mokhatab Rafiei, F., & Ghezelbash, M. (2020). Portfolio selection: a fuzzy-ANP
approach.
Financial Innovation
,
6
(1).
https://doi.org/10.1186/s40854-020-00175-4
Macrotrends. (2023).
Amazon Revenue 20010-2022 | AMZN
. Macrotrends.net.
https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenue
Merrill, T. (2022, November 30).
10 Best Value Stocks to Buy In December 2022
.
FortuneBuilders.
https://www.fortunebuilders.com/best-value-stocks/
Yahoo Finance. (2023, January 5).
Should You Think About Buying Target Corporation (NYSE:
TGT) Now?
Finance.yahoo.com.
https://finance.yahoo.com/news/think-buying-target-
corporation-nyse-120029042.html
Ebiefung, W. (2023, January 12).
3 Reasons to Buy the Dip on Tesla Stock in 2023
. The Motley
Fool.
https://www.fool.com/investing/2023/01/12/3-reasons-to-buy-the-dip-on-tesla-
stock-in-2023/
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