SAMPLE (to upload ) INVESTMENT PORTFOLIO PROJECT (1)

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3-Portfolio Case Project YOUR NAME FINC 340 INVESTMENT Table of Contents Part I: Portfolio Construction and Management 1. Objectives of 3 Portfolios (Policy Statement – Addendum) 2. Portfolio Management Strategies and Design 3. Time Series Recordings (Table 1) Part II: Evaluation and Assessment 1. Profit/Loss for 3 Portfolios (Table 2) (Exhibits 1 & 2) 2. Analysis of P1, P2, and P3 (Table 3) A. Return of investment B. Expected rate of return C. Variance D. Standard deviation 3. Risk return analysis (Table 4) 4. Comparison of the returns (or losses) of P1, P2 and P3 to: A. The S & P 500 B. Dow Jones Industrial Averages C. Russell 2000. 5. Use the Sharpe and Traynor formulas to evaluate P1, P2, and P3 (Table 5) Part III: Quantitative Analysis 1. Computation of Statistics Comparing 3-portfolios. A. Active versus passive portfolio management B. Strategic versus tactical asset allocation C. Observations of the 3-Portfolio Case Study Reference Page 1

Executive Summary Despite large swings in the stock market since the housing crisis of 2008, the stock market remains one of few places where an individual can invest his money, and with proper planning, grow his investments with a surprising degree of predictability. The stability rests in the timely selection of specific stocks, in companies that are well-managed, that have consistently delivered dividends, and have longevity in existence. Looking at the market for these traits lowers risk and results in wealth generation that is dependent upon the investor’s time horizon. The stocks selected bear this out. There is an uncertain path to wealth generation for the trader; the individual who “shorts” his investments, tries to exploit volatile market conditions, and has greater tolerance for risk. There’s nothing wrong with this, if that’s how the individual would like to approach the markets. Investing should be more like watching paint dry or watching grass grow. “If you want excitement, take $800 and go to Las Vegas." - Paul Samuelson. “Risk comes from not knowing what you’re doing.” - Warren Buffett Goals and Objectives The goals and objectives for this investment strategy are to: (1) create a diversified portfolio of stocks, (2) select stocks that have returned dividends consistently over a long period of time, especially those that have returned dividends in highly volatile environments, (3) create via the dividends a steady and growing income stream, dividends to be reinvested into the stocks during the pre-retirement years, and used to supplement income during the retirement years. Portfolio Management Strategies and Design Large and small cap funds were selected, and pooled into three portfolios. Yet after 2

collecting and analyzing the seven week investment period, a greater yield can be secured by re- positioning the stocks from one portfolio to another, by selling off some under-performing equities and reinvesting the funds in greater performing equities. This would be a natural and smart strategy to follow, pigs get slaughtered. Don’t buy into pigs. However, there may be some wisdom in holding back temporarily and allowing the sale of some equities and the dividends to accumulate. The seven week investment timeframe can be an issue of concern due to its non-volatility. The VIX, a measure of market volatility, was 16.48 on 22 Mar 19, dropped as low as 12.01 on 12 Apr 19, and ended at 13.00 on 03 May 19. Yet after the Trump Administration threatened to increase trade tariffs on China, from 10% to 25%, the VIX immediately jumped to 18.60 on Monday 06 May 19. This reflected a substantial level of volatility in the markets. This “spooked” the markets and introduced fear in investors. While the buy price of the selected large cap stocks would fluctuate, due to the consistency of the dividends, the investment is likely to retain a strong level of integrity, and due to the longevity of the companies selected, the likelihood of long term catastrophic damage to the investment is likely to be short-lived. Once stability returns to the markets, and the VIX drops again to the 12.00 to 13.00 level, the investor fear will dissipate and the investor greed will return. Thus, it can be argued that now is an opportune time to jump into the market and buy more stocks, presumably with the dividends you have been accumulating from the initial investments. Times Series Recordings A time series is a sequence of numerical data points in successive order. In investing, a time series tracks the movement of the chosen data points, such as a security’s price, over a specified 3

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period of time with data points recorded at regular intervals. There is no minimum or maximum amount of time that must be included, allowing the data to be gathered in a way that provides the information being sought by the investor or analyst examining the activity. Time series analysis can be useful to see how a given asset, security or economic variable changes over time (Kenton, 2018). It can also be used to examine how the changes associated with the chosen data point compare to shifts in other variables over the same time period (Kenton, 2018). Twelve individual stocks were recorded for a 7 week period to determine the net gains and losses. Table 1 – Time Series Recordings NAME OF SECURITY PRICE WEEK #1 22 Mar 19 PRICE WEEK #2 29 Mar 19 PRICE WEEK #3 05 Apr 19 PRICE WEEK #4 12 Apr 19 PRICE WEEK #5 18 Apr 19 * PRICE WEEK #6 26 Apr 19 PRICE WEEK #7 03 May 19 EXPECTED ENDING PRICE (0.01 gain) ENDING CASH PER COMPANY INCOME STATEMENT: ENDING CASH RECORDED DATE GAIN/LOSS Aflac $49.75 $49.96 $49.00 $49.21 $48.92 $48.93 $50.49 $50.25 $4.35B 31-Dec-18 $0.74 AT&T $30.94 $31.79 $32.35 $31.88 $32.03 $32.16 $30.70 $31.25 $5.204B 31-Dec-18 ($0.24) Coca-Cola $45.58 $46.79 $46.47 $46.64 $47.48 $48.24 $48.72 $46.04 $8.926B 31-Dec-18 $3.14 Exxon $81.70 $81.46 $82.49 $81.56 $81.13 $83.22 $77.47 $82.52 $3.042B 31-Dec-18 ($4.23) $207.97 $210.00 $210.31 $209.29 $209.56 $212.55 $207.38 -0.28% BP PLC $43.95 $43.72 $44.53 $44.67 $44.39 $43.31 $43.08 $44.39 $22.468B 31-Dec-18 ($0.87) Anheuser-Bush $83.21 $83.58 $86.32 $87.23 $89.96 $89.43 $88.10 $84.04 n/a n/a $4.89 Hewlett Packard $20.08 $19.86 $19.79 $19.97 $20.52 $20.14 $15.93 $20.28 $4.88B 31-Oct-18 ($4.15) Apple $194.42 $190.15 $197.00 $200.62 $203.86 $207.25 $211.75 $196.36 $25.913B 29-Sep-18 $17.33 $341.66 $337.31 $347.64 $352.49 $358.73 $360.13 $358.86 4.79% Cherokee Inc. $0.80 $0.72 $0.71 $0.72 $0.70 $0.72 $0.75 $0.81 $4.284M 2-Feb-19 ($0.05) Triton International Ltd. $31.58 $31.73 $31.90 $32.00 $33.50 $33.50 $32.32 $31.90 $159.5M 31-Dec-18 $0.74 Invesco Ltd. $19.73 $19.66 $20.49 $20.79 $21.53 $21.70 $21.92 $19.93 $1.805B 31-Dec-18 $2.19 Global Partners $19.91 $19.57 $19.49 $19.34 $19.07 $19.74 $19.91 $20.11 $60.9M 31-Dec-18 $0.00 $72.02 $71.68 $72.59 $72.85 $74.80 $75.66 $74.90 3.85% Grand Total $621.65 $618.99 $630.54 $634.63 $643.09 $648.34 $641.14 3.04% FINC 340 Investments Stock Tracker Evaluation and Assessment The portfolio that made the most profit was the randomly selected portfolio, with Apple coming in at a $17.33 gain and also had the greatest loss with Hewlett-Packard coming in at a – $4.15 loss. Shares of Apple hit an all-time high on Friday, June 1 of $190. The gain comes amid a bullish note out of UBS. The market cap of the tech giant was nearly $933 billion. The 4

last time Apple hit a high was in early March when shares topped $180. Hewlett Packard Enterprise declared a quarterly dividend on Thursday, April 4th. Investors of record on Wednesday, June 12th will be given a dividend of $0.1125 per share on Wednesday, July 3rd. This represents a $0.45 dividend on an annualized basis and a yield of 2.97%. Table 2 – Profit/Loss Exhibit 1 – Most Gain – APPLE INC. (22 March 2019 - 3 May 2019) 5

Exhibit 2 – Most Loss – Hewlett-Packard (22 March 2019 - 3 May 2019) Analysis of P1, P2, and P3 For each of the twelve stocks, the variance, mean, standard deviation, return on investment and expected rate of return were calculated. The variance is a measure of volatility 6

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because it measures how much a stock tends to deviate from its mean. The higher the variance, the more wildly the stock fluctuates and the riskier the stock. The mean is a statistical indicator that can be used to gauge the performance of: a company’s stock price over a period of days, months, or years; a company through its earnings over a number of years; a firm by assessing its fundamentals such as P/E ratio, FCF, liabilities on the balance sheet, etc.; and a portfolio by estimating its average returns over a certain period. Standard deviation is a mathematical measurement of average variance. It is a prominent feature in statistics, economics, accounting, and finance. For a given data set, the standard deviation measures how spread out numbers are from an average value. Standard deviation is the statistical measure of market volatility, measuring how widely prices are dispersed from the average price. If prices trade in a narrow trading range, the standard deviation will return a low value that indicates low volatility. Return on investment (ROI) is a financial metric of profitability that is widely used to measure the return or gain from an investment. ROI is a simple ratio of the gain from an investment relative to its cost. It is as useful in evaluating the potential return from a stand-alone investment as it is in comparing returns from several investments. An expected rate of return (RoR) is the net gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s initial cost. Gains on investments are defined as income received plus any capital gains realized on the sale of the investment. Table 3 – Analysis of Stocks 7

Risk Return Analysis In investing, risk and return are highly correlated. Increased potential returns on investment usually go hand-in-hand with increased risk. Different types of risks include project- specific risk, industry-specific risk, competitive risk, international risk, and market risk. Return refers to either gains and losses made from trading a security (CFI, 2019). The return on an investment is expressed as a percentage and considered a random variable that takes any value within a given range. Several factors influence the type of returns that investors can expect from trading in the markets (CFI, 2019). Diversification allows investors to reduce the overall risk associated with their portfolio but may limit potential returns. Making investments in only one market sector may, if that sector significantly outperforms the overall market, generate superior returns, but should the sector decline then you may experience lower returns than could have been achieved with a broadly diversified portfolio (CFI, 2019). 8

Table 4 – Risk Return Analysis NAME OF SECURITY EXPECTED ENDING PRICE (0.01 gain) ENDING CASH PER COMPANY INCOME STATEMENT: ENDING CASH RECORDED DATE GAIN/LOSS Aflac $50.25 $4.35B 31-Dec-18 $0.74 Coca-Cola $46.04 $8.926B 31-Dec-18 $3.14 Apple $196.36 $25.913B 29-Sep-18 $17.33 Triton International Ltd. $31.90 $159.5M 31-Dec-18 $0.74 Invesco Ltd. $19.93 $1.805B 31-Dec-18 $2.19 FINC 340 Investments Stock Tracker Aflac with ending cash of $4.35B and Coca-Cola with ending cash of $8.926 came out the best under portfolio 1. Apple with ending cash of $25.913B came out the best under the randomly selected stocks. Triton International with ending cash of $159.5M and Invesco Ltd. with ending cash of $1.805B came out first in the passive portfolio. Comparison Returns The overall performance was a 3.04% gain. Check each of the markets below and compare this against the same seven week time frame. The changes in price were very similar to the S&P 500, the Dows Jones Industrial Averages and the Russell 2000. It was shocking how the change in prices were so close. Sharpe and Traynor The Treynor Ratio is a portfolio performance measure that adjusts for systematic risk. In contrast to the Sharpe Ratio, which adjusts return with the standard deviation of the portfolio, the Treynor Ratio uses the Portfolio Beta, which is a measure of systematic risk (CFI, 2109). These 9

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ratios are concerned with the risk and return performance of a portfolio and are a quotient of return divided by risk. The Treynor Ratio is named for Jack Treynor, an American economist known as one of the developers of the Capital Asset Pricing Model (CFI, 2019). The main difference between the Sharpe ratio and the Treynor ratio is that unlike the use of systematic risk used in case of Treynor ratio, the total risk or the standard deviation is used in case of Sharpe ratio. The Sharpe ratio reveals how well a portfolio performs in comparison to a riskless investment. Table 5 – Sharpe and Traynor Ratios Quantitative Analysis Active Versus Passive Portfolio Management An actively managed investment fund has an individual portfolio manager, co-managers, 10

or a team of managers actively making investment decisions for the fund. The success of an actively managed fund depends on combining in-depth research, market forecasting, and the experience and expertise of the portfolio manager or management team (Lioudis, 2019). Portfolio managers engaged in active investing pay close attention to market trends, shifts in the economy, changes to the political landscape, and factors that may affect specific companies. The stocks under the active portfolio are AFLAC, AT&T, Coca-Cola and Exxon. We chose Aflac Inc. because it boasts an excellent franchise and strong market position in supplemental health insurance in both Japan and the U.S. Aflac U.S. continues to perform strongly as evident by increasing revenues since 2012. Though new annualized premiums sales declined 5.9% year over year to $113.7 billion in 2016, total revenue of $22.6 billion increased 8.1%. We chose AT&T as our second active stock because AT&Ts wireless growth opportunities from the launch of standards-based mobile 5G services in 2018 and the FirstNet project look impressive. While there’s no question that Coke is an iconic brand worldwide, it’s hard to get behind a stock that’s generated an annualized total return of 8.4% over the past three years, 7.9% over the last five years, and 11.5% over the past 10 years, that was my next choice. Lastly, Exxon generates most of its earnings from upstream businesses. Excluding the impact of U.S. tax reform and impairments, the company generated $7.7 billion during 2017 - representing 50.6% of the total profit - from upstream activities. The company's upstream operations, benefiting from the partial recovery in crude prices, are spread across the globe with majority volumes coming from Asia and the United States. Passive management, also referred to as index fund management, involves the creation of a portfolio intended to track the returns of a particular market index or benchmark as closely as possible. Managers select stocks and other securities listed on an index and apply the same 11

weighting. The purpose of passive portfolio management is to generate a return that is the same as the chosen index instead of outperforming it (Lioudis, 2019). A passive strategy does not have a management team making investment decisions and can be structured as an exchange- traded fund (ETF), a mutual fund, or a unit investment trust. The stocks under the passive portfolio are Cherokee Inc., Triton International Ltd., Invesco Ltd. and Global Partners. Cherokee Inc. was chosen because consumer discretionary analysts are forecasting for the entire industry, a positive double-digit growth of 19.51% in the upcoming year, and an enormous growth of 35.77% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Triton International Ltd is now a concern for me because the ownership structure has been found to have an impact on shareholder returns in both short- and long-term. The same amount of capital coming from an activist institution and a passive mutual fund has different implications on corporate governance, which is a decisive factor for a long- term investor. Invesco (IVZ) has an attractive dividend yield, but this is more the result of a lower share price rather than growing dividends. Until the company shows better net flows its yield is not reason enough to buy its shares. We wish we would have sold it sooner. Lastly, Global Partners, another reason to sell soon. While small-cap stocks, such as Global Partners LP (NYSE:GLP) with its market cap of US$543.69M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Strategic Versus Tactical Asset Allocation Strategic asset allocation is a target allocation of asset classes you expect to have in place for a long period of time. For example, an investor might have a balanced portfolio of 50 percent stocks and 50 percent bonds. The target allocation is expected to remain the same and the 12

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portfolio would be re-balanced back to the appropriate allocation as needed. Strategic asset allocation looks more at the overall risk objective of the portfolio, and therefore takes a long- term view (Baish, 2018). Tactical asset allocation is a short to intermediate-term view that looks for investment opportunities in the market. Tactical allocation might be that within the 50 percent stocks part of the allocation, an investor wants to own more in small-cap companies than large-cap companies because small-caps are seen as being a better investment opportunity right now. When large-cap companies look more attractive an investor might overweight, or put more money into, large- caps and allocate less to small-caps. Tactical allocation allows an investor to move into and out of or overweight and underweight certain areas of the market (Baish, 2018). References: Baish, D. (2018, August 30). Tip of the Month: The Difference Between Strategic and Tactical Asset Allocation. Retrieved from https://www.fortpittcapital.com/tip-of-the-month-the- difference-between-strategic-and-tactical-asset-allocation/ Loudis, K. (2019, April 04). Passive vs. Active Portfolio Management: What's the Difference? Retrieved from https://www.investopedia.com/ask/answers/040315/what-difference- between-passive-and-active-portfolio-management.asp CFI (2019). What is ‘Risk and Return? Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/risk-and- return/ Levišauskait, K. (2010). Investment Analysis and Portfolio Management. Retrieved from https://learn.umuc.edu/d2l/le/content/349410/viewContent/14209623/View 13

SAMPLE (to upload ) INVESTMENT PORTFOLIO PROJECT (1)

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