Finance
To assess your understanding of market indexes, ETFs, and how to efficiently (risk/return) allocate equities, fixed income securities, and other asset classes (money market, emerging markets, etc.), respond to the below (1.5 spacing and 12 point font)….emailing your Word document to the professor upon completion.
Part 1
How do the IBB, EFA, XLK, IWD, IWM, JNK, and VIG differ in terms of their components/positions, concentration of top 10 holdings, how they are valued (market/price/equal weighting), whether their returns are more weighted to dividends/interest or capital gains, and what they are used to measure (as a benchmark)/index? Also, how is each performing (relative to each other) over the past 1, 3, 5, and 10 years (annualized)? (30 points)
Next, referencing the past 8 years of annualized returns (CAGR) charting each ETF’s performance, comment on which are more/less correlated to each other….using a basic correlation matrix. (15 points)
https://www.portfoliovisualizer.com/backtest-asset-class-allocation
https://www.portfoliovisualizer.com/efficient-frontier#analysisResults
If 3-4 ETFs (asset classes) offer a relatively low correlation, express how and why you would allocate money in your portfolio that represents a blend of index ETFs…using Markowitz’s Efficient Frontier as a model. Please limit your allocation maximum (per ETF) to 30%. (15 points)
Last, what Sharpe Optimal blend of the above ETF’s (using an allocation of a maximum of 3-4 ETFs from the above choices…with a maximum weight of 30% in one ETF) might provide the best risk/return portfolio (2012-2020? Explain what the optimal “Tangency Portfolio” represents, and how, extending from a Risk-Free Rate of ~1.5%, you can blend an optimal “risky” portfolio with a risk-free asset. If you were to invest 92% in the “tangency portfolio” (optimal risky blend), and 8% in the risk-free asset, what would you 8-year annualized return and standard deviation be? Why is the Sharpe Ratio of this allocation the same as the Sharpe Ratio of the tangency (100% risky blend) portfolio? (20 points)
Part 2
Given the recent increase in consumer demand and strong economic (GDP) recovery fueled by fiscal stimulus and the vaccination rates, please briefly speak to why you might find the Packaging Industry within the Material/Consumer Cyclical Sectors to be attractively positioned in the next 3-5 years. Please also consider and comment on the cyclicality of this sector/industry when accommodating the potential for increased government, business, and consumer spending (see JPMorgan’s Guide to the Markets below), recent changes in term spreads, changes in trends – gauging consumer and business spending, and changes in the Leading Economic Index. (40 points)
https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer
https://finviz.com/screener.ashx?v=111&f=cap_midover,geo_usa,ind_packagingcontainers,sec_consumercyclical
https://scs.fidelity.com/common/application/markets_sectors/business_cycle/Business_Cycle_Sector_Approach.pdf
https://fred.stlouisfed.org/series/T10Y2Y
https://fred.stlouisfed.org/series/USSLIND
https://www.conference-board.org/data/bcicountry.cfm?cid=1
https://www.bea.gov/sites/default/files/2020-10/tech3q20_adv.pdf
https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml
https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_business_cycle.jhtml?tab=sibusiness
Using the in-class examples and textbook for computing a constant and abnormal growth model for the DDM, compute today’s perceived value for the following three stocks: WRK, IP, and CCK Also, use the relative value P/EPS, P/SPS, and P/CFPS models to compute a 12-month forward price. (35 Points)
P0 with DDM and constant growth
P0 with DDM and 2-stage growth
P1 with historical P/EPS, P/CFPS and P/SPS (5 year average) and forecasted EPS1, SPS1, and CFPS1 (EPS0/CFPS0/SPS0 being equal to last 4 quarters on Value Line; price being accessed on finance.yahoo.com at end of the most recent quarter (per ValueLine).
Assume the following:
R is derived probability-based R1000 for past 15 years, assuming a good economy where GPD growth >3%, a normal economy where GPD growth 1.5%-3%, and a poor economy is where GPD growth <1.5%…whereby ERm = 8%, Rf = 1.5%, and Beta is computed by ValueLine.
Gc is 5.5% for constant growth for all 3 stocks;
Ga is 12% for 1st 2 years in 2-stage model…returning to the above Gc for each stock
Historical average P/EPS is based on 5 year average & growth rate for Relative Value model based on Value Line EPS/Sales/CF growth projections to 2024-2026 for each firm)
Briefly discuss why you not only see differences in prices with each model, but why different models have higher/lower valuations….given the influences on each firm’s dividend growth and relative value models. Judging the growth and sustainability over the past few years of each firm’s gross, operating, and net margins, why does one seem to fetch a higher/lower valuation…especially when considering ValueLine’s forecasted growth rates (2024-26) for Sales and Earnings? (20 points)
