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FIN 650: Fall 2018 Group Project # 3 Due Date: Wednesday, September 26, 2018. Data: The data you need to complete this project can be obtained from any financial web site (e.g., http://finance.yahoo.com). Another useful data source is Ken French’s Data Library (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data library.html). I Portfolio Construction: Three Stock Portfolios Suppose you had $100,000 to invest. Construct three stock portfolios, where each portfolio contains at least 5 stocks: 1. A “naı̈ve” portfolio: Construct a portfolio without utilizing any investment principles. Please discuss briefly (Discussion 1) how you constructed the naı̈ve” portfolio. Please limit your discussion to one page of double-spaced text. 2. A “practical” portfolio: use the ideas discussed in Peter Lynch’s book to construct a second portfolio. Explain clearly (but briefly) the ideas which motivated your decisions. You must at least indicate the chapters and/or the page numbers from the text. For full credit, you must indicate the “rules” (e.g., buy small stocks, never buy stocks with high analyst coverage, etc.) you derived from Peter Lynch’s ideas. Please limit your discussion (Discussion 2) to 3 pages of double-spaced text. 3. A “theoretical” portfolio: Applying the basic concepts from portfolio theory, construct a theoretical stock portfolio. For simplicity, use the stocks from the “naı̈ve” and the “practical” portfolios to perform this analysis. You can use the mean-variance analysis or you can construct the theoretical portfolio by simply observing the correlations among the stocks in the “naı̈ve” and the “practical” portfolios. After obtaining the theoretical portfolio, compute the correlation matrix separately for each of the three (naı̈ve, practical, and theoretical) portfolios and attach the results as Exhibit 1. Please discuss briefly (Discussion 3) how you constructed the theoretical portfolio and comment on the structure of the three correlation matrices. Please limit your discussion to one page of double-spaced text. 1 For each stock in the three portfolios, provide the following information: 1. Name of the company, 2. Ticker symbol, 3. Stock price at the end of January 2018 (or any other month in 2018), 4. Return in January 2018 (or any other month in 2018), 5. Annual return in 2017, 6. Number of analysts covering the stock, 7. Consensus analyst recommendation, and 8. Price-To-Earnings (P/E) ratio using the price and earnings information from the most recent quarter. Present this information in a tabular form (Exhibit 2) so that I can easily compare the key characteristics of your portfolios. II Risk Measurement Compute the following three risk measures for each of your three portfolios: 1. Total risk (or portfolio variance), 2. Systematic risk, and 3. Idiosyncratic risk using CAPM. You can use either daily, weekly or monthly data to compute these risk measures. Please justify your choice and mention clearly the time-period you used to estimate the three risk measures. Attach your calculations and results as Exhibit 3. Please highlight the final results. III Performance Evaluation Compute the following performance measures for each of your three portfolios: 1. Mean monthly return, 2. Sharpe ratio, 2 3. Relative Sharpe ratio (SR of a portfolio relative to the SR of the market), 4. Jensen’s alpha, 5. Four-factor alpha, 6. Treynor-Mazuy ratio, 7. M 2 measure, and 8. T 2 measure. You can use either daily, weekly or monthly data to obtain the performance measures. Please justify your choice and mention clearly the time-period you used to estimate the three performance measures. Attach your calculations and results as Exhibit 4. Please highlight the final results. IV Additional Discussions In light of your findings, please discuss your views on: 1. Benefits of security selection, i.e., can investors successfully pick stocks? (Discussion 4); 2. Relation between portfolio diversification and portfolio performance, i.e., does diversification lead to better risk-adjusted performance? (Discussion 5); 3. Market efficiency, i.e., are financial markets efficient or inefficient? (Discussion 6). Please limit each of your discussions to one page of double-spaced text. Note: Please prepare your report in a professional manner because 10% of the grade for the project will be based on your presentation style. Please attach additional material (data, formulas, calculations, etc.) in an appendix and only present your discussions and exhibits in the main part. Obviously, the appendix is optional. 3
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Company Name
Ticker Symbol
Market Cap
Beta

Google Inc.
GOOG
834.372B
1.4

2/1/2017
3/1/2017
4/1/2017
5/1/2017
6/1/2017
7/1/2017
8/1/2017
9/1/2017
10/1/2017
11/1/2017
12/1/2017
1/1/2018

DATA ANALYSIS:
Mean monthly return
Standard deviation
CV

Part 11: Portfolio allocation
Ticker Symbol
Mean monthly return
Standard deviation
Weight
Porfolio return
Portfolio standard deviation

F5 Networks, Inc.
FFIV
8.69B
0.61

Closing Price Change In Price
823.21
829.56
0.77%
905.96
9.21%
964.86
6.50%
908.73
-5.82%
930.50
2.40%
939.33
0.95%
959.11
2.11%
1,016.64
6.00%
1021.409973
0.47%
1046.400024
2.45%
1,169.94
11.81%

0.03348697
0.048043511
143.47%

Closing Price

143.270004
142.570007
129.130005
128.130005
127.059998
120.75
119.379997
120.559998
121.269997
134.199997
131.220001
144.539993

0.00231278
0.058201514
2516.51%

Google Inc.
F5 Networks, Inc. Chevron Corporation
3.35%
0.23%
1.43%
4.80%
5.82%
4.25%
30%
10%
15%
3.35%
6.07%

Exhibit 2

1. Name of the company,
2. Ticker symbol,
3. Stock price at the end of January 2018

Google Inc.

F5 Networks, Inc. Chevron Corporation

GOOG

FFIV

1,169.94

CVX

144.54

121.87

4. Return in January 2018 (or any other month in 2018),11.81%
5. Annual return in 2017,
3.35%
6. Number of analysts covering the stock,
31
7. Consensus analyst recommendation, and Buy
Hold
8. Price-To-Earnings (P/E) ratio
51.54

10.15%
0.23%
21

0.13%
1.43%
15
Buy

27.33

19.25

Correlation -Exhibit 1
GOOG
GOOG
FFIV
CVX
PG
AMAZN
Exhibit 3
Portfolio variance (Total risk)
Systematic risk
Idiosyneratic risk using CAPM

Exhibit 4
1. Mean monthly return,
2. Sharpe ratio,
3. Relative Sharpe ratio (SR of a portfolio
relative to the SR of the market),
4. Jensen’s alpha,
5. Four-factor alpha,
6. Treynor-Mazuy ratio,
7. M2 measure, and
8. T2 measure.

1
0.016071828
0.777761994
-0.001796801
0.964116898

0.37%
(0.17)
5.52%

3.35%
(0.27)
0.614
5.52%
0.56
(0.02)
0.031
0.10

FFIV
1
0.218757503
-0.179369186
0.22972891

CVX

1
0.327944367
0.788464689

F5 Networks, Inc.
FFIV
8.69B
0.61

Chevron Corporation
CVX
234.307B
1.05

Change In Price
-0.49%
-9.43%
-0.77%
-0.84%
-4.97%
-1.13%
0.99%
0.59%
10.66%
-2.22%
10.15%

Closing Price

105.199814
101.363762
100.731224
97.69136
99.495712
104.130524
102.633278
113.181335
111.630508
114.61657
121.717552
121.873108

0.01425869
0.042504757
298.10%

Procter & Gamble Co
AMAZN
-0.22%
3.61%
5%

5.30%
8.07%
40%

Procter & Gamble Co
AMAZN
PG

AMAZN

84.14

1,450.89

Procter & Gamble Co
PG
422.84M
0.38

Change In Price
-3.65%
-0.62%
-3.02%
1.85%
4.66%
-1.44%
10.28%
-1.37%
2.67%
6.20%
0.13%

Closing Price

86.738243
85.576271
83.176147
84.542061
83.639915
87.162102
89.248032
88.00029
83.512245
87.694572
89.536369
84.137672

-0.00216757
0.036090568
-1665.02%

Change In Price
-1.34%
-2.80%
1.64%
-1.07%
4.21%
2.39%
-1.40%
-5.10%
5.01%
2.10%
-6.03%

-6.03%
-0.22%
18
Hold

24.06%
5.30%
44
Buy

22.68

PG

1
-0.03954767

158.63

AMAZN

1

AMAZON.COM INC
AMAZN
700.33B
1.71
Closing Price

845.04
886.54
924.99
994.62
968.00
987.78
980.60
961.35
1,105.28
1,176.75
1,169.47
1,450.89

0.05303264
0.080706903
152.18%

Change In Price
4.91%
4.34%
7.53%
-2.68%
2.04%
-0.73%
-1.96%
14.97%
6.47%
-0.62%
24.06%

portfolio returns

market returns
1.53%
3.32%
4.51%
-2.68%
1.95%
-0.22%
1.42%
7.39%
4.45%
1.30%
13.90%

0.046512
0.020741
-0.14369
0.035593
0.070376
0.12844
0.070461
-0.01899
-0.03097
-0.01198
0.039084

Company Name
Ticker Symbol
Market Cap
Beta

Google Inc.
GOOG
834.372B
1.4
Closing Price

2/1/2017
3/1/2017
4/1/2017
5/1/2017
6/1/2017
7/1/2017
8/1/2017
9/1/2017
10/1/2017
11/1/2017
12/1/2017
1/1/2018

Change In Price

823.21
829.56
905.96
964.86
908.73
930.50
939.33
959.11
1,016.64
1021.409973
1046.400024
1,169.94

9.7

DATA ANALYSIS:
Mean monthly return
Standard deviation
CV

Part 11: Portfolio allocation
Ticker Symbol
Mean monthly return
Standard deviation
Weight
Porfolio return
Portfolio standard deviation

0.77%
9.21%
6.50%
-5.82%
2.40%
0.95%
2.11%
6.00%
0.47%
2.45%
11.81%

13.33
37.42%

0.03348697
0.048043511
143.47%

Google Inc.

Berkshire Hathaway Inc
3.35%
2.09%
4.80%
2.82%
35%
10%
3.04%
5.23%

Google Inc.

Berkshire Hathaway Inc

Exhibit 2

1. Name of the company,

2. Ticker symbol,
3. Stock price at the end of January 2018
4. Return in January 2018 (or any other month in 2018),
5. Annual return in 2017,
6. Number of analysts covering the stock,
7. Consensus analyst recommendation, and
8. Price-To-Earnings (P/E) ratio

GOOG

BRK-B

1,169.94
11.81%
3.35%
31
Buy

214.38
8.15%
2.09%
5
Buy

51.54

11.12

Correlation -Exhibit 1
GOOG
GOOG
BRK-B
CVX
LGND
APPL

Exhibit 3
Portfolio variance (Total risk)
Systematic risk
Idiosyneratic risk using CAPM

Exhibit 4
1. Mean monthly return,
2. Sharpe ratio,
3. Relative Sharpe ratio (SR of a portfolio relative to the
SR of the market),
4. Jensen’s alpha,
5. Four-factor alpha,
6. Treynor-Mazuy ratio,
7. M2 measure, and
8. T2 measure.

BRK-B

1
0.888326778
0.777761994
0.884896594
0.840935831

0.27%
0.08
4.77%

3.04%
(0.37)
0.85
-1.72%
0.07
(0.02)
0.05
(0.26)

1
0.935923113
0.905113903
0.817043148

Berkshire Hathaway IncChevron Corporation
Ligand Pharmaceuticals IncorporatedApple Inc
BRK-B
CVX
LGND
APPL
8.69B
234.307B
5.793B
1.09T
0.84
1.05
1.49
1.26
Closing
Price

171.42
166.68
165.21
165.28
169.37
174.97
181.16
183.32
186.94
193.01
198.22
214.38

Change In
Price
-2.77%
-0.88%
0.04%
2.47%
3.31%
3.54%
1.19%
1.97%
3.25%
2.70%
8.15%

Closing
Price

105.1998
101.3638
100.7312
97.69136
99.49571
104.1305
102.6333
113.1813
111.6305
114.6166
121.7176
121.8731

Change In
Price

Closing
Price

104.63
105.84
111.17
108.28
121.4
120.91
128.87
136.15
145.35
131.85
136...