investment analysis final project

Investment AnalysisPortfolio Project

5/4/2009FIN 6605.81, The spring of 2009, Silberman School of Business, Fairleigh Dickinson UniversityHuma QureshiNroop Bhavsar

Table of contents

Executive Summary…………………………………………………………………….. 3

Goals & objective……………………………………………………………………… 5

Weekly portfolio results………………………………………………………………. 7

Portfolio beta estimation……………………………………………………………… 21

Individual securities analysis………………………………………………………… 23

o General Electric Corp……………………………………………………….. 23

o McDonald’s Corp……………………………………………………………. 32

o Vanguard Short term bond index fund……………………………………. 41

o Family Dollar Stores Inc…………………………………………………… 46

Summary……………………………………………………………………………….. 53

Conclusion…………………………………………………………………………….. 60

Appendix-1…………………………………………………………………………….. 61

Appendix-2…………………………………………………………………………….. 64

Appendix-3……………………………………………………………………………. 66

2

Executive Summary

This project reflects our assigned role as investment analyst or portfolio manager. We invested

maximum $250,000 in at least one stock, one mutual fund, one corporate bond, one treasury

security and one stock option for the short period of 14 weeks starting from Jan 30, 2009 to May

1, 2009. Being an investment analyst, we successfully managed portfolio by updating it every

week by selecting securities on basis of our investment objective.

Stocks Mutual Funds Corportate bonds

T-bills Cash $-

$10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000

$100,000

Investment in different securities

Week-1Week-14

We chose our investment objective is to preserve the capital. So, goal to be attained according to

our objective was to preserve our capital in that bear market rather than to lose along with

market. Thus, we learnt to select securities to invest in for the portfolio on the basis of their beta-

the risk measure and understood the concept and importance of portfolio beta to fulfill

investment objective.

Further, we have demonstrated weekly results of our portfolio with sufficient details. It shows

how far we reached to attain our investment goals.

Week-1 Week-14Overall return on investment

Total Portfolio value $ 250,000 $ 242,319 -3.07%NYSE Composite value 5195.79 5,568.76 7.18%

3

1 2 3 4 5 6 7 8 9 10 11 12 13

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Portfolio return % NYSE Composite index return %

Above chart supports our investment objective. We have successfully managed to preserve our

capital over extremely volatile course of the market. Lower portfolio beta of approx. 0.29 makes

portfolio returns very less sensitive with market returns over the same time period.

Later in this project, we discussed the news and market/ industry information that affected the

performance of the individual securities in our portfolio. We analyzed stock performance and

ratings, debt structure, competitive environment, current economic situation, impacts of

globalization and options & preferred stocks (if any).

In the conclusion, we summarized everything that we learned in the context of portfolio

formation and market efficiency, diversification, appropriate choice of securities for investment

objective, CAPM, option profit diagrams and trading strategies.

4

Statement of objective

Introduction

Investment objective changes for most of the people throughout their life. It is all dependent on

the risk and return factor and individual’s willingness to take risk or in other words people need

to be compensated with proper return against the value of the risk they take, and this is termed as

risk aversion. Capital appreciation may be more important for the young investors as they are

more willing to take risk but later stage when one enters the golden years of their life they

became more risk aversive and would move with placing more importance on gaining income

and preserving it. Risk is often defined as portfolio volatility, or the fluctuation in the value of

your assets over time. Understanding one’s tolerance for risk which differs for each investor is

the key to choose an investment strategy. But the most successful investment should be well

diversified. Moreover a well diversified portfolio can not only help to reduce unwanted risk but

also contribute to winning the portfolio.1

Goals and Objective

From the very beginning we were well defined to choose our objective of the portfolio. We were

decided to move with the objective of preserving the capital. The reason behind this was the

time period in which we were given this project. Presently the economy is facing recession, thus

moving with the objective of preserving the capital was a wise decision. As it’s hard to beat the

market or maximize the current cash flow in such economy. Moreover, in order to preserve our

capital we have invested in such stocks like family dollar and Wal-Mart which opt to move better

compared to other fields even in such economy. In addition we have preserved ample of cash and

invested in the Treasury bill which are risk free. The beta of the stocks that we have invested in

is low. The companies with lower beta tend to do better in such period of recession. We started

with selecting the stocks of the companies that had relatively low beta like GE, Wal-Mart and

Family dollar. Thus, we understood the importance of portfolio beta in preserving our objective.

1 www.investopedia.com

5

http://www.investopedia.com/

We have even preserved ample of cash on hand which is a plus sign in preserving our capital.

Moreover, investing in the bonds and mutual funds will help us to gain long term returns and

give a steady cash flow over the time. Mutual funds offer diversification, convenience and high

liquidity. Our portfolio beta ended up with 0.2926 that is approx of 0.30. The market beta is 1.

Thus if the return on the market portfolio changes by 1%, then our portfolio return will change

by 0.2926%. Thus a low beta indicated good sign of investment in the recessionary economy.

JNJ

WMT

MCDFD

O GIS

PRGFXVBISX

GE Bond

PFE Bond

13- wee

k T- b

ill

26- wee

k T- b

ill

MCDOJ.X Cash0

0.2

0.4

0.6

0.8

1

1.2

Security betaMarket betaBE

TA

We started our portfolio with a cash of $ 250,000 and by the end of the 14th week we had it about

$ 242,320 which shows we made a loss of $ 7680. We were able to maintain the rest of our

capital during this 14 week project. Thus the loss which we incurred in the project was because

of the beta of the market that moved opposite to our assumption. The beta of our portfolio is

moving quite consistently but the market beta is too volatile. That is the reason our portfolio

shows this negligible amount of loss.

Thus during our project we tried buying and selling few stock, exercised our option and tried

using our cash on hand in more productive way thereby sticking to our objective of preserving

the capital. 2

2 Security and Portfolio Analysis, Douglas and Janis.

6

Weekly portfolio results

Week-1

January 30, 2009

Investments CUSIP/ TickerTrading

placeQuantity Price $ Total Value $

Stocks

Johnson & Johnson JNJ NYSE 300 57.69 17,307

Wal-Mart WMT NYSE 300 47.12 14,136

Mc Donald's MCD NYSE 300 58.02 17,406

Family Dollar Stores FDO NYSE 250 27.77 6,943

JP Morgan & Chase Co. JPM NYSE 400 25.51 10,204

Mutual Funds

Legg Mason Opportunity Primary LMOPX NYSE 1,000 4.82 4,820

T. Rowe Price Growth Stock PRGFX NYSE 500 18.83 9,415

Corporate Bonds

General Electric 36962G3H5 NYSE 15 978.05 14,671

Pfizer 717081AR4 NYSE 15 1,085.47 16,282

T- Bills

13 weeks 912795L66 2 9,996.18 19,992

26 weeks 912795Q95 2 9,982.34 19,965

Options

Rio Tinto PLC RJTDC.X NYSE 200

Expire- 17 April, 2009

Strike- 115.00

CALL

JP Morgan Chase JSAOS.X NYSE 400

Expire- 20 March, 2009

Strike- 22.50

PUT

Total $ 151,140

Cash in hands $ 98,860

Total Portfolio value $ 250,000

NYSE Composite value 5,195.79

7

Week 1-2

January 30- February 6, 2009

Investments CUSIP/ Ticker Quantity Price $ Total Value $ Price $2 Total Value $3

Stocks

Johnson & Johnson JNJ 300 57.69 17,307 58.51 17,553

Wal-Mart WMT 300 47.12 14,136 49.63 14,889

Mc Donald's MCD 300 58.02 17,406 58.46 17,538

Family Dollar Stores FDO 250 27.77 6,943 26.92 6,730

JP Morgan & Chase Co. JPM 400 25.51 10,204 27.63 11,052

Mutual Funds

Legg Mason Opportunity Primary LMOPX 1,000 4.82 4,820 5.09 5,090

T. Rowe Price Growth Stock PRGFX 500 18.83 9,415 20.06 10,030

Corporate Bonds

General Electric 36962G3H5 15 978.05 14,671 961.63 14,425

Pfizer 717081AR4 15 1,085.47 16,282 1,062.14 15,932

T- Bills

13 weeks 912795L66 2 9,996.183 19,992 9,993.70 19,987

26 weeks 912795Q95 2 9,982.34 19,965 9,980.93 19,962

Options

Rio Tinto PLC RJTDC.X 200


Strike- 115.00

CALL

JP Morgan Chase JSAOS.X 400


Strike- 22.50

PUT Jan 30, 2009 Feb 6, 2009

Total $ 151,140 $ 153,188

Cash in hands $ 98,860 $ 98,8984

Total portfolio value $ 250,000 $ 252,086

1- week portfolio return 0.8344%

NYSE Composite value 5,195.79 5,475.28

1- week NYSE Composite return 5.3792%

3 T-bill price calculation is shown in Appendix-24 For cash in portfolio, BCLR (Brokers cash loan rate) is used to find its FV. Calculation is shown in Appendix-2

8

Week 2-3

February 6- February 13, 2009

Investments CUSIP/ Ticker Quantity Price $ Total Value $ Price $2 Total Value $3

Stocks


Wal-Mart WMT 300 49.63 14,889 46.53 13,959

Mc Donald's MCD 300 58.46 17,538 56.81 17,043



Mutual Funds



Corporate Bonds


Pfizer 717081AR4 15 1,062.14 15,932 1,103.10 16,547

T- Bills

13 weeks 912795L66 2 9,993.70 19,987 9,993.50 19,987

26 weeks 912795Q95 2 9,980.93 19,962 9,977.80 19,956

Options

Rio Tinto PLC RJTDC.X 200 12.5 2,500


Strike- 115.00

CALL

JP Morgan Chase JSAOS.X 400 1.73 692


Strike- 22.50

PUT Feb 6, 2009 Feb 13, 2009

Total $ 153,188 $ 153,518

Cash in hands $ 98,898 $ 95,7435


1- week portfolio return -1.1208%


1- week NYSE Composite return -4.9042%

5 Adjusted by adding options RJTDC.X & JSAOS.X to portfolio

9

Week 3-4


Investments CUSIP/ Ticker Quantity Price $ Total Value $ Price Total Value $2

Stocks


Wal-Mart WMT 300 46.53 13,959 50.02 15,006

Mc Donald's MCD 300 56.81 17,043 54.57 16,371



Mutual Funds


T. Rowe Price Growth Stock PRGFX 500 19.53 9,765 18.54 9,270 -

Corporate Bonds


Pfizer 717081AR4 15 1,103.10 16,547 1062.62 15,939

T- Bills/ Bonds

13 weeks 912795L66 2 9,993.50 19,987 9,994.67 19,989

26 weeks 912795Q95 2 9,977.80 19,956 9,978.18 19,956

30 years T- bond 912810QA9 15 992.65 14,890

Options

Rio Tinto PLC RJTDC.X 200 12.5 2,500 9.6 1,920


Strike- 115.00

CALL

JP Morgan Chase JSAOS.X 400 1.73 692 5.4 2,160


Strike- 22.50

PUT Feb 13, 2009 Feb 20, 2009

Total $ 153,518 $ 165,149

Cash in hands $ 95,743 $ 80,8847

Total Portfolio value $ 249,261 $ 246,033



1- Week NYSE composite return -7.7255%

6 Bond price calculation shown in Appendix-27 Adjusted by buying 30 year treasury bonds

10

Week 4-5


Investments CUSIP/ Ticker Quantity Price $ Total Value $ Price Total Value $2

Stocks

Johnson & Johnson JNJ 300 54.65 16,395 50 15,000

Wal-Mart WMT 300 50.02 15,006 49.24 14,772

Mc Donald's MCD 300 54.57 16,371 52.25 15,675



Mutual Funds


T. Rowe Price Growth Stock PRGFX 500 18.54 9,270 17.75 8,875 -

Corporate Bonds


Pfizer 717081AR4 15 1062.62 15,939 1,065.47 15,982

T- Bills/ Bonds

13 weeks 912795L66 2 9,994.67 19,989 9,997.50 19,995

26 weeks 912795Q95 2 9,978.18 19,956 9,979 19,958

30 years T- bond 912810QA9 15 992.65 14,890 $ 992.70 14,891

OptionsRio Tinto PLC RJTDC.X 200 9.6 1,920 7.3 1,460


Strike- 115.00

CALL

JP Morgan Chase JSAOS.X 400 5.4 2,160 1.98 792


Strike- 22.50

PUT Feb 20, 2009 Feb 27, 2009

Total $ 165,149 $ 160,618

Cash in hands $ 80,884 $ 80,915




1- Week NYSE composite return -3.9022%

11

Week 5-6

February 27- March 6, 2009

Investments CUSIP/ Ticker Quantity Price $ Total Value Price Total Value2

Stocks

Johnson & Johnson JNJ 300 50 15,000 47.97 14,391

Wal-Mart WMT 300 49.24 14,772 48.91 14,673

Mc Donald's MCD 300 52.25 15,675 52.12 15,636



Mutual Funds



Corporate Bonds


Pfizer 717081AR4 15 1,065.47 15,982 1,048.31 15,725

T- Bills/ Bonds

13 weeks 912795L66 2 9,997.50 19,995 9,995.64 19,991

26 weeks 912795Q95 2 9,979 19,958 9,982.03 19,964

30 years T- bond 912810QA9 15 $ 992.70 14,891 994.6 14,919

Options

Rio Tinto PLC RJTDC.X 200 7.3 1,460 6.4 1,280


Strike- 115.00

CALL

JP Morgan Chase JSAOS.X 400 1.98 792 8.25 3,300


Strike- 22.50

PUT Feb 27, 2009 March 6, 2009

Total $ 160,618 $ 157,669

Cash in hands $ 80,915 $ 80,946




1- week NYSE composite return -7.2025%

Week 6-7

12

March 6- March 13, 2009

Investments CUSIP/ Ticker Quantity Price $ Total Value Price Total Value2

StocksMarch 6, 2009

March 13, 2009


Wal-Mart WMT 300 48.91 14,673 49.19 14,757

Mc Donald's MCD 300 52.12 15,636 52.38 15,714


JP Morgan & Chase Co. JPM 400 15.93 6,372

Genentech Inc. DNA 125 - 94.2 11,775

General Mills Inc. GIS 200 - 52.6 10,520

Mutual Funds - - Legg Mason Opportunity Primary LMOPX 1,000 3.37 3,370 T. Rowe Price Growth Stock PRGFX 500 16.99 8,495 18.34 9,170 Vanguard Short term bond index VBISX 1,000 - 10.18 10,180

Corporate Bonds - -


Pfizer 717081AR4 15 1,048.31 15,725 1,037.68 15,565 - -

T- Bills/ Bonds - -

13 weeks 912795L66 2 9,995.64 19,991 9,997.17 19,994

26 weeks 912795Q95 2 9,982.03 19,964 9,983.78 19,968 30 years T- bond 912810QA9 15 994.6 14,919 969.69 14,545

-

Options - -

Rio Tinto PLC RJTDC.X 200 6.4 1,280 - Expire- 17 April, 2009 - - Strike- 115.00 - - CALL - -

JP Morgan Chase JSAOS.X 400 8.25 3,300 - Expire- 20 March, 2009 -

Strike- 22.50 - PUT -

McDonald's MCDOJ.X Expire- March 20, 2009 Strike- 50.00 BOUGHT PUT

300 0.25 75

Total $ 157,669 $ 178,807

Cash in hands $ 80,946 $ 63,017 8



NYSE Composite Return 4,284.49 4,721

1- week NYSE Composite return 10.1881%

Week 7-8


8 Adjusted by proceeds from sale of 400 shares of JPM @ $23.75 (Subtracting call premium of $400), 200 call options of RTP @ $6.8, 1000 mutual fund shares of LMOPX @ $4.11 & further investing in GIS, DNA, VBISX & MCDOJ.X

13

InvestmentsCUSIP/ Ticker Quantity Price Total Value Price2 Total Value3

Stocks March 13 March 20


Wal-Mart WMT 300 49.19 14,757 49.59 14,877

Mc Donald's MCD 300 52.38 15,714 53.2 15,960


Genentech Inc. DNA 125 94.2 11,775 93.72 11,715

General Mills Inc. GIS 200 52.6 10,520 47.22 9,444

Mutual Funds -


Vanguard Short term bond index VBISX 1000 10.18 10,180 10.24 10,240

Corporate Bonds -


Pfizer 717081AR4 15 1,037.68 15,565 1,054.11 15,812

T- Bills/ Bonds -

13 weeks 912795L66 2 9,997.17 19,994 9,997.57 19,995

26 weeks 912795Q95 2 9,983.78 19,968 9,985 19,970

30 years T- bond 912810QA9 15 969.69 14,545 975.62 14,634

-

Options -

- McDonald's MCDOJ.X Expire-

March 20, 2009 Strike- 50.00 BOUGHT PUT

300 0.25 75 0.05 15

Total 178,807 178,904

Cash in hands 63,017 63,041

Total Portfolio value 241,824 241,946


NYSE Composite value 4,721 4,832.13

1- week NYSE composite return 2.3540%

Week 8-9


Investments CUSIP/ Ticker Quantity Price Total Value Price2 Total Value3

14

Stocks March 20 March 27


Wal-Mart WMT 300 49.59 14,877 52.57 15,771

Mc Donald's MCD 300 53.2 15,960 55.01 16,503

Family Dollar Stores FDO 250 30.86 7,715 33.63 8,408 - -

Genentech Inc. DNA 125 93.72 11,715 -


Mutual Funds -



Corporate Bonds


Pfizer 717081AR4 15 1,054.11 15,812 1053.89 15,808

T- Bills/ Bonds

13 weeks 912795L66 2 9,997.57 19,995 9998.62 19,997

26 weeks 912795Q95 2 9,985 19,970 9986.665 19,973

30 years T- bond 912810QA9 15 975.62 14,634 982.91 14,744

Options - -

McDonald's MCDOJ.X Expire- May 15, 2009 Strike- 50.00 BOUGHT PUT

300 0.05 15 0.4 120

Total $ 178,904 $ 171,158

Cash in hands $ 63,041 $ 74,780 9

Total Market value of portfolio $ 241,945 $ 245,939

1 week portfolio return 1.6505%


1 week NYSE composite return 5.4740%

Week 9-10

March 27- April 3, 2009

InvestmentsCUSIP/ Ticker

Quantity Price Total Value Price2 Total Value3

Stocks March April 3

9 Adjusted by proceeds of 125 shares of DNA @ $ 93.72

15

27

Johnson & Johnson JNJ 300 52.83 $ 15,849 52.15 $ 15,645

Wal-Mart WMT 500 52.57 $ 15,771 53.8 $ 26,900

Mc Donald's MCD 500 55.01 $ 16,503 56.64 $ 28,320

Family Dollar Stores FDO 250 33.63 $ 8,408 31.9 $ 7,975

General Mills Inc. GIS 200 50.85 $ 10,170 50.86 $ 10,172

Mutual Funds

T. Rowe Price Growth Stock PRGFX 500 19.9 $ 9,950 19.99 $ 9,995

Vanguard Short term bond index VBISX 1000 10.23 $ 10,230 10.24 $ 10,240

Corporate Bonds

General Electric 36962G3H5 15 909.014 $ 13,635 879.04 $ 13,186

Pfizer 717081AR4 15 1053.89 $ 15,808 1046.8 $ 15,702

T- Bills/ Bonds

13 weeks 912795L66 2 9998.62 $ 19,997 9998.38 $ 19,997

26 weeks 912795Q95 2 9986.665 $ 19,973 9986.41 $ 19,973

30 years T- bond 912810QA9 15 982.91 $ 14,744 968.65 $ 14,530

OptionsMcDonald's MCDOJ.X

Expire- May 15, 2009 Strike- 50.00 BOUGHT PUT

500 0.4 $ 120 0.15 $ 75

Total $ 171,158 $ 192,709

Cash in hands $ 74,780 $ 52,72110

Total market value of portfolio $ 245,938 $ 245,430

1 week portfolio return -0.2068%

NYSE Composite value 5096.64 5318.75

NYSE Composite return 1 week 4.3580%

Week 10-11

April 3- April 10, 2009


10 Adjusted by buying 200 additional shares of each WMT & MCD

16

Stocks April 3 April 10


Wal-Mart WMT 500 53.8 26,900 50.66 25,330

Mc Donald's MCD 500 56.64 28,320 56.67 28,335



Mutual Funds



Corporate Bonds


Pfizer 717081AR4 15 1046.8 15,702 1071.0531 16,066

T- Bills/ Bonds

13 weeks 912795L66 2 9998.38 19,997 9998.93 19,998

26 weeks 912795Q95 2 9986.41 19,973 9987.84 19,976

30 years T- bond 912810QA9 15 968.65 14,530 960.59 14,409



500 0.15 75 0.03 15

Total $ 192,709 $ 192,408

Cash in hands $ 52,721 $ 52,741

Total Market value of portfolio $ 245,430 $ 245,149


NYSE Composite value 5,319 5,376.44

NYSE Composite return 1 week 1.0847%

Week 11-12




17


Wal-Mart WMT 500 50.66 25,330 50.2 25,100

Mc Donald's MCD 500 56.67 28,335 56.09 28,045



Mutual Funds


Vanguard Short term bond index VBISX 1000

10.23 10,230 10.28 10,280

Corporate Bonds


Pfizer 717081AR4 15 1071.0531 16,066 1065.79 15,987

T- Bills/ Bonds

13 weeks 912795L66 2 9998.93 19,998 9999.45 19,999

26 weeks 912795Q95 2 9987.84 19,976 9990.0542 19,980

30 years T- bond 912810QA9 15 960.59 14,409 951.77 14,277



500 0.03 15 0.05 25

Total Value 192,408 191,660


Total Portfolio value 245,149 244,421


NYSE Composite Value 5,376.44 5,480.60

NYSE Composite 1 week return 1.9373%

Week 12-13




18

Johnson & Johnson JNJ 30053.05

15,915 50.92 15,276

Wal-Mart WMT 50050.2

25,100 47.87 23,935

Mc Donald's MCD 50056.09

28,045 54.31 27,155

Family Dollar Stores FDO 25032.82

8,205 32.79 8,198

General Mills Inc. GIS 20049.89

9,978 48.73 9,746

Mutual Funds

T. Rowe Price Growth Stock PRGFX 50020.6

10,300 20.83 10,415

Vanguard Short term bond index VBISX 100010.28

10,280 10.27 10,270

Corporate Bonds

General Electric 36962G3H5 15904.62

13,569 905.3 13,580

Pfizer 717081AR4 151065.79

15,987 1066.42 15,996

T- Bills/ Bonds

13 weeks 912795L66 29999.45

19,999 9999.79 20,000

26 weeks 912795Q95 29990.0542

19,980 9991.425 19,983

30 years T- bond 912810QA9 15951.77

14,277 939.551 14,093

OptionsMcDonald's MCDOJ.X Expire-

May 15, 2009 Strike- 50.00 BOUGHT PUT

500 0.05 25 0.3 150

Total Value $ 191,660 $ 188,796

Cash in hands $ 52,761 $ 52,781



NYSE composite value 5,480.60 5,468.41

1 week NYSE composite return -0.2224%

Week 13-14

April 24- May 1, 2009


Stocks April 24 May 1

19


Wal-Mart WMT 500 47.87 23,935 50.05 25,025

Mc Donald's MCD 500 54.31 27,155 52.4 26,200



Mutual Funds



Corporate Bonds


Pfizer 717081AR4 15 1066.42 15,996 1079.57 16,194

T- Bills/ Bonds

13 weeks 912795L66 2 9999.79 20,000 10,000 20,000

26 weeks 912795Q95 2 9991.425 19,983 9992.366 19,985

30 years T- bond 912810QA9 15 939.551 14,093 907.727 13,616

OptionsMcDonald's MCDOJ.X Expire-

May 15, 2009 Strike- 50.00 BOUGHT PUT

500 0.3 150 0.4 200

Total Value 188,796 189,518


Total portfolio value 241,577 242,319


NYSE Composite Value 5,480.60 5,568.76

1- week NYSE composite return 1.6086%

Portfolio Beta estimation

As of May 1, 2009

InvestmentsCUSIP/ Ticker Quantity Total Value Weight Wi Beta Bi Wi*Bi

20

StocksJohnson & Johnson JNJ 300 15,777 0.065108 0.59 0.038413792

Wal-Mart WMT 500 25,025 0.103273 0.23 0.023752682

Mc Donald's MCD 500 26,200 0.108121 0.65 0.07027897

Family Dollar Stores FDO 250 8,035 0.033159 0.23 0.007626486

General Mills Inc. GIS 200 10,096 0.041664 0.27 0.011249257

Mutual Funds

T. Rowe Price Growth Stock PRGFX 500 10,555 0.043558 1.01 0.043993686

Vanguard Short term bond index VBISX 1000 10,280 0.042423 0.53 0.022484318

Corporate Bonds11

General Electric 36962G3H5 15 13,556 0.055943 1.19 0.066571641

Pfizer 717081AR4 15 16,194 0.066829 0.118 0.00788582

T- Bills/ Bonds12

13 weeks 912795L66 2 20,000 0.082535 0 0

26 weeks 912795Q95 2 19,985 0.082474 0 0

30 years T- bond 912810QA9 15 13,616 0.056190 0 0

Options13

McDonald's MCDOJ.X Expire- May 15, 2009 Strike- 50.00 BOUGHT PUT

500 200 0.000825 0.4225 0.000348712

Cash 52,801 0.217898 0 0

Total Portfolio value $ 242,320 1.000000

Portfolio Beta= ∑ Wi * Bi= 0.2926

11 Bond’s beta BD= BL-BU; where BL was found to be from Yahoo! Finance and BU can be calculated using Hamada’s equation BL= BU [ 1+ (1-Tax rate) * LTD/ Equity ]12 Beta of Government securities and cash are almost zero as they are assumed to be risk free13 We have assumed beta of a put option as 0.65* respective stock’s beta

21

1 2 3 4 5 6 7 8 9 10 11 12 13

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Theoratical portfolio return acc. To beta NYSE Composite index returnReal portfolio return

In above chart, we calculated theoretical return on our portfolio according to its overall beta.

That goes well together with real portfolio return that we got. Differences are because of higher

volatility of market and securities changes during the period that we did not consider counting

real return on portfolio.

So, theoretical portfolio return line shows the expected return on portfolio which we found

greater than that real return on portfolio over the 14- week period. This phenomenon is further

explained by CAPM analysis which we will discuss later.

22

Individual securities analysis

General Electric Co. (NYSE: GE)

General Electric Company (GE) operates as a technology, media, and financial services company

worldwide. Its Energy Infrastructure segment produces gas, steam, and aero derivative turbines;

generators; and combined cycle systems, as well as provides water treatment services and

equipment. This segment also sells surface and subsea drilling and production systems, floating

production platform equipment, compressors, turbines, turbo expanders, and high pressure

reactors to national, international, and independent oil and gas companies; and offers equipment

overhauls and upgrades, pipeline inspection and integrity services, remote diagnostic and

monitoring, and contractual service agreements. The company’s Technology Infrastructure

segment manufactures jet engines, aerospace systems and equipment, and its replacement parts,

as well as provides repair and maintenance services for commercial aircraft; military aircraft,

including fighters, bombers, tankers, and helicopters; marine applications; and executive and

regional aircraft.

Energ

y Infra

structu

re

Tech

nology In

frastr

ucture

NBC Universa

l

Capita

l Finan

ce

Consumer

& Industr

ial $-

$20,000 $40,000 $60,000

GE Segments' revenues 2008 in $ millions

This segment also produces healthcare products, including diagnostic imaging systems; offers

transportation products and maintenance services; provides enterprise solutions using sensors for

temperature, pressure, moisture, gas and flow rate, as well as non-destructive testing inspection

equipment. GE’s NBC Universal segment engages in the production and distribution of films and

television programs; operation of television stations and cable/satellite television networks, as

well as theme parks. The company’s Capital Finance segment offers loans, leases, and other

financial services to customers, including manufacturers, distributors, and end-users of

23

equipment and major capital assets. Its Consumer & Industrial segment produces various house

hold appliances, lighting products, and electrical equipment and control products, as well as

provides related services. The company was founded in 1892 and based in Fairfield, Connecticut.

Beta (Risk)

Risks to our recommendation and target price include the possibility of a deeper than expected

Global recession, as well as greater than expected credit losses in Capital Finance.

Bl LTD Equity Tax Rate

1.46 $330,067,000,000 $104,665,000,000 5.5%

Hamada’s equation: Bl= Bu { 1+ (1-Tax rate) LTD/Equity }

So, Bu was found to be 0.367

Higher beta of 1.46 supports the above technical chart analysis of stock price of GE compared to

DJI. GE has high risks compared to market. So, when market goes down like in current

recessionary situation, GE stock price sinks more than a market does.

Firm’s business risk contains no leverage. It is the risk related to its operations. While levered

beta contains both financial risks and business risks. Company’s lower equity portion as

compared to that of long term debt, shows its higher financial risk (Bl-Bu= 1.093)

24

Industry Analysis & impact of current economy

The volume of the electricity generated in US is expected to increase at about 1% annually in the

five years through 2009. The industry will experience a medium level of volatility over this

period with the annual real change in the revenue ranging from a decrease of 10.30% to increase

of 4.9%.

The impact of the current recession on this industry will be negative. The lower level of the

commercial property development, rising level of unemployment, falling company profits, have

in particular had a hard hit on the company. Lower level of capital expenditure will be reduced in

the light of the recession which will drag down industry growth further. A slower global

economy will also impact the export markets. Sales in the electrical equipment will be impacted

by a downtown in the residential building activity and industrial production.

The top five players account for the 33% of the industry revenue. Out of which GE contribution

is 7.1%. The main factors affecting the industry performance is the downstream demand,

industrial production index and the real GDP growth. 14

Company analysis & influence from financial & economic events

G.E.'s industrial business is buffered from the cycles of big-ticket equipment orders by its

services business, which involves maintaining, repairing and upgrading industrial products. In

fact, services account for 30 percent of the revenue of G.E.'s industrial businesses, and 70

percent of the profits. Profits at G.E.'s media and entertainment unit, NBC Universal, fell 45

percent, pulled down by weak advertising for broadcast television and online and declining

attendance at its theme parks.

Profit margins fell in 2005, despite slow growth in labor costs, due to increases in material costs,

which were not fully passed on to customers in the form of higher unit selling prices due in part

14http://www.geconsumerproducts.com/pressroom/press_releases/company/company/

ge_estaraward_2009.htm

2 IBIS World, Industry outlook, SIC Code 33531www.ge.com

25

http://www.geconsumerproducts.com/pressroom/press_releases/company/company/ge_estaraward_2009.htm

http://www.geconsumerproducts.com/pressroom/press_releases/company/company/ge_estaraward_2009.htm

to competitive pressures from imports. Industry profit margins are expected to improve in 2006

through 2007 due to: continued real growth in revenue; a greater concentration on higher margin

products; improved pricing; industry consolidation; and the impact of company productivity and

cost initiatives (such as from previous reductions in employee numbers, which increased revenue

per employee). Profit margins will come under some pressure in 2008 due to higher raw material

prices and a slowdown in sales in the last quarter. Margins in 2009 will be impacted by a

decrease in sales and in capacity utilization. The value of total US imports of electrical

equipment is expected to increase at an average annualized real rate of 5.1% in the five years

through 2009. China increased its share of imports of industry products into the US, from 9.9%

in 2004 to 14.6% in 2008.

Product and service differentiation & diversification through globalization

GE offers one of the most comprehensive portfolios of product for the energy industry. It offers

technology for oil and gas, fossil, nuclear, solar and wind applications. It works after providing

the most innovative ways to produce efficient and reliable power. Thus it helps the world that’s

demands a reliable supply of clean and dependable power. It moves from providing a simple

maintenance service to sophisticated technology upgrades.

47%

24%

13%

6% 8%

3%

2008 Revenues in $ billions

US Europe Pacific BasinMiddle East & Africa Americas Other Global

Source: GE Annual report 2008 1

The U.S. Department of Energy and the U.S. Environmental Protection Agency have awarded

GE Consumer & Industrial the ENERGY STAR® Sustained Excellence award for the fourth

straight year. Also this marks the sixth year GE has been acknowledged as an ENERGY STAR

26

Partner of the Year. These awards recognize GE's tremendous efforts to create high-performance

household appliance and lighting products that help reduce energy spending and protect the

environment.

GE has introduced a new product that is first incandescent-shaped energy smart CFL bulb. It

accepts this product to be accepted by the people that want the energy savings and long life

performance. GE Consumer and Industrial span the globe as an industry leader in major

appliances, lighting and integrated industrial equipment, system and services. Thus GE initiatives

to aggressively bring the market new technologies that help consumers meet pressing

environment challenges, to deliver comfort, convenience and electrical protection and control.

Thus being consumer oriented helps it to gain more profitability and thereby bringing it market

share to boost.

GE Global Exchange Services and GE Systems Services, to enter the burgeoning worldwide

market for business-to-business e-commerce. Through the effort, GE plans to compete with the

upstart leaders in the market, Commerce One and Ariba. GE Global Exchange Services will

focus on four markets: Internet data exchange, enterprise application integration software,

procurement software and services, and trading partner exchanges. GE Systems Services will

provide global technology support to GE Global Exchange Services activities.

Competitive analysis

Siemens is Europe's largest electronics and electrical engineering company with worldwide

operations in the industrial automation and control, information and communications, lighting,

medical, power transmission, and transportation sectors. In the year ended September 30, 2007,

Siemens generated net sales of approximately US$105.9 billion. The company's US subsidiaries

accounted for 21.7% of consolidated net sales in fiscal 2007, and the US accounted for 35.2% of

consolidated non-current assets. The company has recently focused on expanding operations in

the US and has reorganized their US operations as Siemens Corporation.

Citigroup Inc. doing business as Citi, provides a range of financial products and services to

consumers and corporate customers. It mainly does its business through four segments: Global

Cards, Consumer Banking, Institutional Clients Group and Global Wealth Management. Thus it

involves itself in providing a wide range of services including the various credit cards, consumer

27

financing, loans, securities and banking activities to advisory financial planning and wealth

management.

9%7%

6%

6%

5%

4%

3%2%

58%

Electric equipment manufacturers in the US; Market share 2008

Rockwell Automation, Inc.General Electric CompanySiemens AG ADSABB, Limited ADREaton CorporationBaldor Electric CompanySchneider Electric SACooper Industries LimitedOther

Source: IBIS World , FDU online library 1

Citi announced today it is providing direct custody and clearing services (DCC) to clients in the

Ukraine. This is the eighth new market Citi has opened in two years taking its proprietary

network – the largest in the world – to 52 markets. Citi currently serves 27 markets in Europe,

the Middle East and Africa. This will help it to give better services to its members and get hold

to profitable profits and maintain the high quality of the services. This helps the capital market

by providing the services required by the broker dealers and global custodian to support the

trading and the investment activities around the world. Global Transaction Services offers

integrated cash management, trade, and securities and fund services to multinational

corporations, financial institutions and public sector organizations around the world. With a

network spanning over 100 countries, Citi's Global Transaction Services supports over 65,000

clients. As of 4th quarter 2007, it held on average $245 billion in liability balances and $13.1

trillion in assets under custody. 15

153 http://www.citigroup.com/transactionservices/home/about_us/press_room/current/2008_0416.jsp

28

http://www.citigroup.com/transactionservices/home/about_us/press_room/current/2008_0416.jsp

Options

Yes. There are options available on stock of GE.

Maximum volume of call options were found to be in the money and put options were found to

be out of the money. This volume trading of options indicates that investors expect the stock

price of GE to go down from its current price of $12.69 as of May 1, 2009. So, we can say that

current GE stock may be overpriced.

Capital structure and Bond rating

As of December 2008,

Long term debt Short term debt Total Equity

330,067,000,000 248,610,000,000 104,665,000,000

Total Debt= 330,067,000,000 + 248,610,000,000 =$ 578,677,000,000

Debt in Capital Structure= Total debt/ Total debt + Total equity= 84.68% with 57% in long term

debt & 43% short term debt.

Rating Agency Bond rating

Standard & Poor’s AA+

Fitch AA

Bond yield Vs. Treasury yield curve

We have taken following bond into consideration:

Price 105.00

Coupon rate 5%

Maturity date Feb 1, 2013

First coupon date Aug 1, 2003

29

Stock ratings

The Street HOLD

ValuEngine Positive Buy

Price Target research D-F: Negative- lowest; Strongly underperform

in future

Standard & Poor’s HOLD with $ 14.00 12-month target price

Thus, we conclude that stock price of GE is likely to go up if you hold it for considerably long

term.

Upper Management Team

Jeffrey Immelt Chairman & CEO

Jeff Gaspin President

Peter Ehrenheim President

Keith Sherin SR VP & CFO

Michael Neal Vice Chairman

30

McDonald’s Corp. (NYSE: MCD)

We can conclude from above chart that MCD has almost doubled the stock returns over the last 5

years. Company’s cost effective fast food for consumers, makes it give stable returns over last

year of bear market or recession. McDonald’s Corporation, together with its subsidiaries,

franchises and operates McDonald’s restaurants in the food service industry worldwide. Its

restaurants offer various food items, soft drinks, and coffee and other beverages. As of December

31, 2008, the company operated 31,967 restaurants in 118 countries, of which 25,465 were

operated by franchisees; and 6,502 were operated by the company. McDonald’s Corporation was

founded in 1948 and is based in Oak Brook, Illinois.

Beta (Risk)

Bl LTD Equity Tax rate

0.77 10,186,000,000 13,382,000,000 30%

31


Thus, Bu was found to be 0.5023

These betas near to market beta of 1, indicates the same volatility as the market has had since last

5 years. MCD has a volatility rank of 97, which is significantly higher than industry rank of 55.16

Firm’s business risk contains no leverage. It is the risk related to its operations. While levered

beta contains both financial risk and business risk. Company’s almost equal equity and long term

debt portions, show its considerable financial risk (Bl-Bu= 0.2677).

Industry analysis

By the turn of the century, in a single day an average of four out of every ten people frequented

an eating establishment, and the total portion of the American food dollar spent eating out had

grown to 45 percent. Despite being dominated in the advertising media by the mega fast-food

16 Value engine detailed research report MCD

32

chains, such as McDonald's, most restaurants remained small operations into the twenty-first

century.17

We believe that impact of current recession on the industry will be negative. Falling disposable

incomes and the increasingly frugal consumer, arising from the recession will see this industry

suffer in the current period. Consequently, consumers are likely to increase consumption of

foods cooked inside the home, thereby reducing their expenditure on eating out. Rising

unemployment and falling household incomes pose the biggest threat to industry growth, as

consumers become more wary of their spending habits. Further, the high level of market

saturation provides limited growth opportunities for expansion. Given that fast food outlets are

considerably cheaper compared to full-service restaurants, consumers will shift their eating-out

preferences to cheaper alternatives during the recessionary period. As a highly saturated industry

with low barriers to entry, industry participation and employment are expected to decrease as the

major franchised players continue to consolidate their operations in order to reduce competition.

The industry is labor intensive given the need for personal, face to face service and labor input in

all areas from acceptance of deliveries, order-taking, serving and cleaning, as well as in the

management of each store. Revenue volatility is low due to the very high household penetration

rate for quickservice meals. The industry also covers a wide variety of foodstyles, of appeal to

changing consumer tastes and demand.18

Company analysis & influence from financial & economic events

Since 2003, MCD has been on the move. It has come along with a stock price of $12.50 to $57.

Their ability to innovate in the food service cannot be matched by any of its competitors.

Although the market had too much move, the company’s share is rising as investors are finding

safe heaven in the Big Mac. One of the reasons to hold is also the global exposure. The inclusion

of the ‘Plan to Win’ since 2003 has shown a dynamic way in approaching the business.19

The strategy focused by McDonald has helped it in gaining higher sales, revenue and better

result for the shareholders. Major focusing in brand affordability, menu variety and other

choices it managed in increasing the global sales in spite of the present economic environment.

17 Business & Company resource center, FDU online library18 IBIS World, Industry outlook, SIC Code 581219 http://www.cattlenetwork.com/Retail_Content.asp?contentid=289421)

33

http://www.cattlenetwork.com/Retail_Content.asp?contentid=289421

Thus the strength of the alignment between the company, its franchisees and suppliers has been

the key to McDonalds’s success over the years.

U.S. Bank and Wells Fargo & Co. both recently announced that they’re offering new lending

programs that benefit McDonald’s U.S. franchisees. The programs deliver favorable financing

options on restaurant acquisitions, rebuilds and relocations, equipment purchases and restaurant

improvements. Both banks also stressed that their payments, cash management, and savings and

checking accounts and other small-business products can also be tailored to the needs of

restaurant franchises.20

The stock price knocked down 14% because the company did so well in the first half of the last

year that it was to match the growth rate. But the recent fall in the stock price is just because of

the pathole in the drive through lane. McDonald strives to manage its momentum even in this

economy. Month after month it has shown stronger than expected sales in the United States and

abroad. Lastly the company had delivered a 55 consecutive monthly of increase in the global

same store sales. The share of McDonald gained nearly 6% making the company one of the only

two in the Dow Jones industrial average whose share price rose in 2008. The relentless focus in

the recent years in improving the store operation and measuring progress has helped the

company strive long. New service and meal menu is another reason for the companies keeping

up. Thus it is the motto of quality, service, cleanliness and value that keeps it going. The

external factors including the unprecedented volatility in foreign currency rates and commodity

cost will bring the pressure on the revenue and the margin comparison on the company that

would that would in turn affect the stock prices in the market.

Product and service differentiation & diversification through globalization

The global comparable sales of MCD increased 7.1% in January, 2009. In addition, the sales for

the MCD worldwide restaurant were up by 2.6%. MCD continues to appeal to the customers by

offering high quality, affordable meal options and unparalleled convenience. The better

20 http://moneycentral.msn.com/content/P118107.asp

http://www.aboutmcdonalds.com/mcd/media_center.html

34

http://moneycentral.msn.com/content/P118107.asp

performance of McDonald’s was the result of the convenient operating hours, combination of the

menu offerings and promotional activities.

34%

42%

18% 5%

2008 Revenues in $ millions

U.S.EuropeAPMEAOther Countries

Source: MCD 2008 Annual report 1

McDonald provides a great diversification in its services. Most of the restaurants are both

counter and drive through with indoor and sometimes outdoor seating. It includes various theme

restaurants like Rock and Roll and the 50’s theme. Moreover the business model is slightly

different from the most of the other fast food chains. Moreover McDonald serves the society by

meeting its varied needs whether it’s pertaining to its taste or the rituals.21

Competitive analysis

Burger King is a global chain of fast food hamburger restaurants, which ranked No. 2 in the

world behind McDonald’s. The company has some 11,565 in the U.S. and more than 70

countries, of which 1,260 are company owned and 10,205 are franchised. Burger King has

established several subsidiaries to develop strategic partnerships and alliances to expand into

new territories; in Europe, Burger King's subsidiary Burger King Europe GmbH is responsible

for the licensing and development of BK franchises in the that market, Africa and Western Asia.

21 http://www.spiritus-temporis.com/mcdonald%27s/emblem-for-globalization.html

35

In Asia, the BK AsiaPac, PTE. Ltd. business unit handles franchising for East Asia, the Asian

subcontinent and all Oceanic territories except Australia. Burger king was nominated as the best

licensee of the year. This has helped it in providing the services with great speed and also

addition of the new product and the new territories.22

13%10%

7%

6%

5%5%

2%2%

52%

Market Share in %, 2008

McDonald's Corp.Yum1 Brands, Inc.Wendy's/Arby's Group, Inc.Starbucks Corp.Burger King Corp.Doctor's Associates Inc.Domino's Inc.Jack in the box, Inc.Other

Source: IBIS World, Fast food restaurant 1

Burger king franchisee has improved the speed of service and operational intelligence with the

help of PAR Technology which is an completely integrated technology solution. Through this

system the counter along with the back office activities can be carried on simultaneously with

ease and speed. It helps in managing the labor, inventory and in store production. Thus it has

helped the firm in gaining the operational efficiencies thereby giving customer satisfaction and

improvisation of the speed of service.

McDonalds opened at $54.05. So far today, the stock has hit a low of $53.03 and a high of

$54.14. Over the last 52 weeks the stock has ranged from a low of $45.79 to a high of $67.00.

22 http://www.marketintelligencecenter.com/articles/826583

http://www.ecommercetimes.com/story/10062.html

www.nytimes.com

36

http://www.nytimes.com/

http://www.ecommercetimes.com/story/10062.html

Shares of MCD are trading lower after competitor Burger King Holdings reported preliminary

third-quarter revenue of $600 million.

Options

Yes. There are options available on the stock of this firm.

When we observe options trading for the firm, the higher volume traded options are found to be

out of money. After observing volume trading for both call & put options for MCD, stock of

MCD was found to be overpriced. This shows market expectations for the MCD’s stock price to

fall in specific time.

Capital structure & bond rating


Long term debt Short term debt Total Equity

10,186,000,000 2,538,000,000 13,382,000,000

Total debt= 10,186,000,000 + 2,538,000,000 = 12,724,000,000

Debt in capital structure= 12,724,000,000/ (12,724,000,000+13,382,000,000) = 48.74% with

80% long term debt and 20% short term debt.

Rating agency Rating

Standard & Poor’s A

Moody’s Aa2

Fitch A

Bond yield Vs. Treasury yield

37

We have taken following bond into consideration:23

Current price 106.55

Coupon rate 4.125%

First payment date Dec 1, 2003

Maturity June 1, 2013

YTM 2.446%

MCD bond yield Vs. US Treasury yield 1

Stock Ratings

Analyst Rating

The Street B – buy with target price $65.45

ValuEngine Positive- buy with fair value $64.70

Price target research Positive B- buy with target price $60 in 6

months

23 Yahoo! Finance24 Corporate bond yield was taken from www.investinginbonds.com

38

Standard & Poor’s Strong Buy- with target price of $66 in 12

months

Shares are likely to be viewed as somewhat of a defensive play as the global economy slows, or

even contracts, in 2009. Furthermore, the $2.00 per share annual cash dividend is an additional

attraction to owning the shares. In summary, we view the shares as recession resistant, but not

recession immune.

Upper management team

Name Position acquired

Andrew McKenna Sr. Chairman

James Skinner Vice Chairman & CEO

Ralph Alvarez President, COO & Director

Peter Benson CFO

Vanguard Bond Index Fund Short (NYSE: VBISX)

39

Vanguard Short-Term Bond Index is ranked among 343 Fixed Income General Short funds by

S&P's three-year and overall rank of this fund. Funds are ranked on three year Sharpe Ratio.

The Fund seeks to track the performance of a broad, market-weighted bond index. Based on an

evaluation of certain characteristics of this fund, Standard & Poor's classifies Vanguard Short-

Term Bond Index as a Fixed Income General Short fund. Fixed Income General Short Funds seek

current income and preservation of capital. In pursuit of these objectives, the managers of such

funds invest primarily in investment-grade corporate bonds, U.S. Treasury securities or bonds

issued by U.S. government agencies.25

VBISX fund is from Vanguard family and it has been managed by Davis since January, 2005. It is

headquartered in Valley Forge, PA.

25 Standard & Poor’s, VBISX Fund report

40

5%0%

95%

0%

VBISX Fund composi-tion

CashStocksBondsOther

26

76%

11%

7%7%

Sector weightings

Government/ AAA ratedA ratedBBB ratedAA rated

27

TOP 10 PERFORMING FUNDS IN THIS CATEGORY (BASED ON 3-YEAR TOTAL

RETURNS)28

Name Ticker Return Lipper Leader

Total

ReturnConsistent

ReturnPreservation

TaxConsistency

Expense

1.Vanguard Sh-Tm Bd;Adm VBIRX 5.88%

2.Vanguard Sh-Tm Bd;Inv VBISX 5.80%

3.Allegiant:Ltd Mat;I AINIX 5.21%

4.Janus Short-Term Bond JASBX 4.94%

5.Allegiant:Ltd Mat;A AINRX 4.91%

6.Allegiant:Ult Sh Bd;I ASDIX 4.83%

7.Northern Instl:Sh Bd;A BSBAX 4.70%

8.HighMark:Sht-Tm Bd;Fid HMSFX 4.67%

9.Allegiant:Ult Sh Bd;A ASDAX 4.63%

26 Yahoo! Finance27 The Wall Street Journal28 The Wall Street Journal

41

10.T Rowe Price ShTm Bd PRWBX 4.58%

Risk Measurements for 3 years

Fund Vs. S&P 500

R squared 0.00

Beta 0.01

Alpha 0.47

Market Comparison29

For the ten-year period ended March 31, 2009, Vanguard Short-Term Bond Index had an average

annualized total return of 4.9%, versus a total return of 5.7% for the Lehman Brothers U.S.

Aggregate Bond Index. On a total return basis, this fund ranked 254 within the entire universe of

1,148 funds in the Domestic Taxable Fixed Income category. On a one-year total return basis,

this fund ranked 539 within the entire universe of 2,731 funds in the Domestic Taxable Fixed

Income category. The fund has outperformed the Lehman Brothers U.S. Aggregate Bond Index

in 2 of the last 5 years.

Peer Comparison30

For the ten-year period ended March 31, 2009, Vanguard Short-Term Bond Index had an average

annualized total return of 4.9% compared with a total return of 3.3% for all Fixed Income

General Short funds. This fund ranked 3 within the entire universe of 146 funds in this peer

group. The fund has outperformed its peer group index (Lehman Brothers 1-3 Year Government/

Credit Index) in 3 of the last 5 years.

29 Standard & Poor’s, Net Advantage, FDU online library30 Standard & Poor’s, Net Advantage, FDU online library

42

Style Composition (S&P 500) 1

This is the reason why we chose VBISX for our portfolio. Because it is composed of majority of

short-term and intermediate-term funds and this is ideal for 14-week portfolio investment.

Further, as we have seen earlier, 95% of the fund comprises of short term bonds which have

Government/ AAA ratings. This shows lower risks compared to that of peers and this makes it

one of the ideal choices to invest according to our investment objective.

Rankings/ Ratings

Standard & Poor’s31

Overall

Overall style ranking

1-year

3-year

5-year

10-year

Overall category ranking

31 Standard & Poor’s, Net Advantage, FDU online library

43

Domestic taxable fixed income

3-year risk rank Moderately low

Morningstar rating32

32 Yahoo! Finance

44

Family Dollar Stores Inc. (NYSE: FDO)

Years Stock Returns Volatility

1 4.19% 8.08%

3 0.77% 8.6%

5 9% 8.40%

Source: Yahoo Finance

We can conclude from above chart and table that FDO has given stable positive average return

on the stock over the last 5 years. It is in the retail industry which provides cost effective items

and grocery to consumers. We can see the higher returns from the chart over the last one year

after official declaration of recession in US in December 2007. It clearly shows that FDO

performs better in bear market and provides good returns of the stocks.

45

Beta ( Risk)

Bl LTD Equity Tax rate

0.04 250,000,000 1,254,083,000 35.57%


This was Bu was found to be 0.0354

As we discussed about stock price movements in the current market above, beta supports that. A

very low beta of 0.04 shows that FDO has less risks compared to market proxy. So, when market

goes up, FDO performs average and when market goes down, FDO performs better than the

firms which have higher betas or betas near to 1.

Firm’s business risks contain no leverage. It is the risk related to its operations. While levered

beta contains both financial risks and business risks. Company’s higher equity portion as

compared to that of long term debt, shows its negligible financial risk ( Bl-Bu= 0.0046).

46

Industry Analysis

Discount department stores are also known as discount variety stores, general merchandise

discount stores, mass merchandisers, full-line discounters, or discount houses. This industry is

dominated by the Wal-Mart, Target, and the Kmart/Sears (the two companies merged in 2005)

chains. The common element among all stores in the industry is the focus on low prices.

Variety stores can be categorized by price and level of service, and generally fall into one of the

following categories: discount department stores, wholesale clubs, supercenters, hypermarts, and

so-called category killers.33

INDUSTRY REVENUE & FORECASTS34

We forecast that this industry will grow at an average annual rate of 1.8% during the five year

period to 2013. Retailers will find 2009 a difficult trading period. The depressed economic

climate is likely to continue throughout the rest of 2009, as deteriorating conditions lead to

further increases in the unemployment rate, and income growth remains stunted. During the later

part of the year, consumer sentiment may improve slightly, which may have a positive affect on

industry sales.

33 Business & Company Resource Center, FDU online library34 IBIS World, Industry Outlook, SIC Code 5331

47

In 2010 and 2011, revenue growth is expected to gain some momentum. Growth will once again

be aided by the incremental benefits associated with new store growth. This will not only include

new entrants but also new store expansions by the major players seeking to expand its customer

base. Households will respond by increasing purchasing from industry stores. Overall retail

consumption will increase in 2010 but will show the largest jump in 2011, further signs of an

economy well on its way to a recovery. The remainder of the outlook will be positive, with

growth returning to pre-recession rates. However, the industry is expected to lose a portion of its

share from the overall sector, highlighting the industry's inability to attract traffic despite deep

discounts.35

Company analysis and influence from financial & economic events

Family Dollar's report of strong first-quarter gains followed a year in which the company's stock

price soared by 30%, leading all companies on the S&P 500.The shares of the family dollar

surged 11 percent after it gave the second quarter profit forecast. The second quarter sales for the

company increase 6.4%. Family Dollar Increases Regular Quarterly Dividend by 8%. Family Dollar

Stores benefited from bargain hunters. Shares soared after the North Carolina-based company,

which runs 6,600 stores, raised its fiscal second-quarter estimate.3637

There is recession in the economy and moreover there are too many layoffs. Consumer is moving

to value oriented retailer being more concerned about the budget. Thus this is one major reason

for the retailer like the family dollar to gain more customers which in turn would help in gaining

sales and raising the earning s and the market share for the stores. Moreover the diverse chain of

product offered by the family dollars also helps in gaining many customer as one can fulfill his

need of any product in the a store.

On other hand the increase in the dividend. For the consecutive 33rd year reflects the stores confidence

in the long term growth opportunity. Thus this is also adding to the stock value rise of the store. Moreover

the family dollar is trying to carry on the plan for the budget price food at its stores which would be an

added help in incorporating a more smooth sale system that can result in more profitability and rise in the

market price.

35 IBIS World, Industry Outlook, SIC Code 533136 MARKET WATCH, BUSINESS Pg 16A37 http://www.familydollar.com/news.aspx?p=news&nyo=0

48

Significant product or service changes or developments

Moreover FDO is termed as the best performing stock in the S&P 500 for the year 2008. This is because

it is one of the simplest and the lowest cost retailer in the country with just over 6600 stores. The reason

behind this is the technical and the fundamental moves which make the stock of the FDO go bullish. It

has set at least four higher lows and higher highs over the past six months. In addition it is 20% below the

52 week high and 35% below its all time high. Family dollar stores are concentrated more where the

housing and the apartment rates are going up in low income areas. This means that more people coming

through the doors and through the check-out lines. Family Dollar leases the majority of their real

estate. With the mounting troubles of commercial retail property companies, Family Dollar will

likely be able to negotiate "no-change" lease rates as they come up for renewal and in some cases

they should be able to secure lower rates just to re-sign.38

With the shift in the economy, family dollar is actively altering its product mix to focus more on

consumables and less on discretionary items. It is trying to reinforce more promotionally priced offerings

and expand its assortment of the key consumables such as food. This is helped in grasping better returns

on inventory investment and increased profitability. The new strategy includes the revamping of Family

dollar’s point of sale technology for quicker check out customer service as well as the addition of the food

stamp and credit card payment option. Thus promotional and private label goods and leveraging the

synergies are helping Family dollar to be nicely positioned to compete even in the tough times.39

Competitions in domestic & multinational market

One of the major competitors of Family dollar can be considered as Wal-Mart. It is one of the largest

retailers. It works on the mission of “We save people money so they can live better”. Country by country;

Wal-Mart is trying to move with a vision to become a global brand, just like Mc Donald and Coco-cola,

having monopoly over the global retail market. Wal-Mart works on the strategy of corporate takeover in

the other countries. Entering a new market its tries to buy an already fully operated company and slowly

take over it. Thus in this way the competitor gets eliminated and Wal-Mart can gain real estate. But by

doing this it also threatens the small shops in the country as Wal-Mart unstoppable spread continues. In

38 http://seekingalpha.com/article/112929-and-the-winner-is-family-dollar

39 http://www.hometextilestoday.com/article/CA6636495.html

49

http://seekingalpha.com/article/112929-and-the-winner-is-family-dollar

April 2001 the company’s international operations stood at 1494 units in total, Mexico 641, Puerto Rico

53, Canada 236, Argentina 11, Brazil 144, China 35, UK 267. Its international sales were 47.5 Billion

dollars, which was a 16.6% increase compared to the previous year. International Operating profit was

2.3 billion dollar, which was 18.6% more as compared to the previous fiscal year. This does have a

devastating effect in the retail industry worldwide. 40

21%

16%

10%9%

45%

Market Share in %, 2008

Dollar General Corp.Family Dollar Stores, Inc.Big Lots, Inc.Dollar Tree Stores, Inc.Other

Source: IBIS World, Dollar & Variety sto 1

Options

Yes. There are options available on the stock of this firm. Current stock price of the firm as of

March 23, 2009 is $ 31.93.

When we observe options trading for the firm, the most of the options traded were found to be

out of the money. After observing volume trading for the call and put options, we found higher

volume trading for put options of strike price $ 30. This shows market expectations for the

FDO’s stock price to fall in specific time. Moreover, we can conclude that market believes that

FDO is overvalued.

Capital Structure & Bond rating

40 http://www.projectcensored.org/top-stories/articles/25-wal-mart-brings-inequality-and-low-prices-to-the-world/

50

http://www.projectcensored.org/top-stories/articles/25-wal-mart-brings-inequality-and-low-prices-to-the-world/


Long term Debt Short term debt Total Equity

338,714,000 1,068,985,000 1,254,083,000

Total debt= 338,714,000 + 1,068,985,000= 1,407,699,000

Debt in capital structure= 1,407,699,000/ (1,407,699,000+1,254,083,000) = 52.9%

Preferred Stock

Company does not have any preferred stocks.

Stock Ratings

Analyst Rating

The Street BUY

Money Central @ MSN HOLD

Money Central Analysts' rating 1

Thus, we can say that holding a stock of FDO will turn in to a good investment strategy if you

are considering long term horizon. We can suggest selling FDO after end of recessionary period.

Because it has less potential to earn higher returns in normal or bull market.

Upper management team

51

Name Position acquired

Howard R. Levine CEO & Chairman

R. James Kelly President & COO

C. Martin Sowers SVP, Finance

Kiley F. Rawlins VP, investor relations & communication

Kenneth Smith CFO

52

Summary

In the first week we selected the stock of the companies with low beta and also invested in two

bonds one of 13 week and the other of 26 week and options selected were the call and put option

to gain in the short run as a hedging tool against the stock. We added a thirty year bond in the

third week. This was done in order to lower the risk of the portfolio by weighing more in

Government securities. In the sixth week we added one more MF of Vanguard in our portfolio

and added a put of McDonald. VBISX is composed of short term and intermediate term funds

and this is well suited for fourteen week portfolio investment. Further, 95% of the fund

comprises of short term bonds which have Government/AAA ratings and this ratings show lower

risk compared that of peers. This makes it one of the ideal choices to invest according to our

investment objective. After realization of portfolio beta with our investment objective, we chose

GIS and DNA because of their extremely low betas and there recession resistant characteristics.

During the seventh week, we exercised JPM put option (400) at the exercise price of $ 23.75 and

gained $1000 but we could have lost more than $3000 if we didn’t have the put option for JPM.

In the ninth week we sold off the stock of the DNA, because DNA was acquired by Roche

Pharmaceuticals.

Portfolio formation and Diversification

The first step in the formation of the portfolio starts with selecting the objective. This would

result in the asset allocation. Asset allocation is the stage of investment process in which the

most appropriate investment instruments are selected. We have invested in few stock, mutual

fund, bond, Treasury bill and options. Thus the portfolio is diversified and opts to gain the

benefit of diversification. We have even maintained good amount of cash on hand that can be

utilized later in adding few more securities to our portfolio. The risk and return factor also plays

a major role in the formation of the portfolio. Higher the risk higher the return. One needs to take

risk in order to earn return. Diversification improves the risk return tradeoff. Diversification

works because the return on the individual security is not perfectly correlated over time. Less

than 1 helps to reduce the risk. The benefits of efficient diversification leads to minimizing the

risk for a given level of expected return and maximize the return for the given level of the risk.

Thus one moves keeping in mind the specific investment goals and the risk level. In our portfolio

we selected the objective of preserving the capital that’s the reason we have tried investing good

53

amount of cash in the bonds and the Treasury bill. We learned that the statistical measure of risk

is standard deviation. The lower the Standard deviation lower is the risk and vice versa.

Moreover a well diversified portfolio should include 9-14 securities and we do have considered

this point in our portfolio formation as it includes 10-15 securities in it.

Market Efficiency

In an efficient market the prices of stock respond quickly and accurately. Technology, Number

or traders, Communication and other resources have made all the information available and have

created the capital market efficient. Thus the technical and the fundamental analysis play a major

role in better implication of the efficient markets. Technical analysis is all dependent on the

correlation between the securities considering the study of the past performance using the past

data to speculate the future. Fundamental analysis relates to the financial statement, the market

and the competitors. It states that every security eventually sells for its intrinsic value. Thus both

of this analysis helps us a lot on deciding our portfolio return. In our portfolio we tried selecting

the stock considering the financial statements of the companies. Moreover the fundamental

analysis of the company was taken into consideration while working through the project. This

states that fundamental analysis is based on the foundational logic.4142

Options

A security whose value is derived from the underlying one or more asset is termed as option. It

gives the holder of the option the right but not the obligation to buy or sell. Thus it helps the

investor to gain the advantage of the inherent leverage. Thus the holder will benefit greater return

in comparison of buying the shares due to the inherent leverage. We invested in the call and put

option of the Rio Tinto and JP Morgan Chase initially which we exercised at maturity moreover

in the later stage we even invested in the put option of the McDonald. As of May 1, 2009, We

made a loss of $ 200 as put premium because we did not exercise our put option as it was out of

money. We managed to cover loss on put option by keeping sufficient cash balance in our

portfolio.

41 Random Walk Down Wall Street, Malkiel.

42 Security and Portfolio Analysis, Douglas and Janis.

54

At last trading day of portfolio, our put option was out of money. So, we did not exercise it.

Therefore, it ends up with loss of $ 6.2 per stock of MCD.

S0= $ 58.2 (Jan 30, 2009)

ST= $ 52.4 (May 1, 2009)

Strike price= $ 50

Put premium= $0.4

Trading strategies

One of the utmost important strategies for the trading is diversification. It is well said that never

to put all eggs in a single basket. Thus we tried using this strategy of diversification in our

project whereby we invested in the varied stock of the companies and even invested in the

Treasury bill, options and Mutual fund in order to gain the advantage of the diversification. We

tried to diversify by investing the capital in the stock of the companies like McDonalds, Wal-

55

Max. Profit of $ 49.6

Breakeven point at stock price of $ 49.6 ( S < E)

E= 50 and maximum loss of $ 8.6

Another breakeven point at stock price of $ 58.6 (S>E)

Max. loss of $ 8.6

Stock Price

mart and Family Dollar that tend to move steadily in such recessionary period. Investment in

bonds and Mutual funds and Treasury bills, which gives the advantage of liquidity and being risk

free. Thus having low correlation between the securities helps to gain the benefit of

diversification. The change in one security will not bring a simultaneous change in value and

direction of the other security. This is how diversification helps in gaining in a portfolio.

Hedging can be termed as the one of the best strategy in order to follow the capital preservation

goal. It is a way of protecting the investment by reducing the risk that is involved in holding a

particular stock. We have utilized the hedging strategy by buying the put option in our portfolio.

Through this we tried to offset the risk that the price of that particular stock will fall. We even

bought the call option to offset the price of that particular stock to rise in the near future.43

Long term horizon can be beneficial in case one chooses proper asset allocation. Even though

our project was for short period of 14 weeks, we tried to include Mutual fund and the Treasury

bond that cannot give short term profit. Moreover long term horizons we tempt to move keeping

in mind the economic conditions and the other factors that affect the market and that brings a risk

return tradeoff in the picture. Thus we tried to adjust our asset allocation keeping in mind the

long term goals even though we were given this project for a short period of time. We tried

investing in the securities assuming the long term goals.

Short term and long term diversification

Short term and long term analysis: We were given a project that was stretched for 14 weeks. This

could be considered as the short term projects because it lacked the gain of time diversification

that could be achieved in case of long term investment. It is said that longer holding periods have

historically lowered the risks associated with the stock investing. In other words as with the stock

return, the standard deviation and the covariance fall consistently as the length of the holding

period increases. Thus the annualized standard deviation declines as the time horizon increases.

This is called as time diversification. Thus our project being short term we could not gain the

benefit of the long term diversification. It only resembles the short term volatility and the

temporary gain or loss for the portfolio.44

43 www.stocktrading.com44 Pg 493, Security and Portfolio Analysis, Douglas and Janis

56

Deficiency

The only deficiency with this portfolio project we found is time period. We believe that 14 week

period is really short period for getting good investment results by following “Preserving the

Capital” objective. Further, diversification has less earning potential in short term period.

Following chart explains this deficiency:

-10.00%-8.00%-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%12.00%

1 2 3 4 5 6 7 8 9 10 11 12 13

Portfolio return %

NYSE Composite index return %

Linear (Portfolio return %)

The straight line shows the trend (Technical Analysis) of getting higher returns on portfolio in

long term as compared to that of short term.

CAPM Analysis

Capital Asset Pricing Model assumes that most of the investor avoids risk and those who do take

risk, expect to be rewarded. Market is a fair game. CAPM gives the graphical relationship

between the expected return and the standard deviation of the portfolio. In equilibrium the

investor chooses efficient combination based on the risk free rate and the market portfolio. The

Security Market Line (SML) and the Capital Market Line (CML) both has different risk

measures. One uses the Standard deviation and other uses the Beta calculation. But the taste and

the preference of the individual help in selection of the securities considering the slope of the

CML or SML.45 46

45 Class Notes, Investment Analysis.46 Security and Portfolio Analysis, Douglas and Janis.

57

Risk Free Rate = Treasury Bill Yield for 13 week period

i.e. 0.155%

Market Return = 7.18% (NYSE Composite Index)

What would have been the expected return based on Market return and Beta?

E(Ri) = Rf + [(Rm-Rf)*Bp

=0.155 + (7.18-0.155)*0.29

= 2.19%

As per the CAPM we should have the return equal to 2.19%. But in our project, our portfolio has

a return of -3.07%.

0 0.2 0.4 0.6 0.8 1 1.20.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Returns

58

Conclusion

What your objective would be in case if you need to conduct this project again.

In need of conducting this project once again, we would apply the same strategy to select the

objective the way we did in our present project. We decided to work with the objective of

preserving our capital based on the economy and the market condition. Stock Market is affected

by the economic factors like inflation, GDP and NI as well as financial policies like the monetary

policy and the fiscal policy. The companies trading their securities on the stock market reflects to

the changes in the economic condition according to their beta, correlation coefficient and

covariance. At present we selected the objective of preserving the capital keeping in mind the

bear market and the recession period. Thus if the market is facing the same situation we will

again move with the same objective but in case if the market is bullish its more interesting to

work with the objective of maximizing the return or beating the market. Thus keeping in mind

the market condition, whether it is bullish or bearish we would be selecting our portfolio

objective.

Thus this class helped us a lot in making us known with the varied investment concept and the

portfolio formation and various calculation relating to it in deep.

Given the amount of $ 250000 and working with creating a portfolio and working on it

every week was worth learning

We learned to know the factors that affect the investment strategy

We learned how to calculate the Treasury bill and bond prices

We learned about the calculation of the security beta and the portfolio and the

importance of the market proxy.

Even working with the option and the profit diagram was worth a good experience where

we learned about the short and long stock and various diagram in various positions.

59

Appendix-1

Weekly price quotes of securities in portfolio47

47 Yahoo! Finance The Wall Street Journal www.investinginbonds.com www.treasurydirect.gov

60

http://www.treasurydirect.gov/

http://www.investinginbonds.com/

Investments CUSIP/ Ticker 20-Feb-09 27-Feb-09 6-Mar-09 13-Mar-09 20-Mar-09

Stocks

Johnson & Johnson JNJ 54.65 50 47.97 50.64 51.67

Wal-Mart WMT 50.02 49.24 48.91 49.19 49.59

Mc Donald's MCD 54.57 52.25 52.12 52.38 53.2

Family Dollar Stores FDO 27.02 27.44 30.36 31.52 30.86

JP Morgan & Chase Co. JPM 19.9 22.85 15.93 23.75

Genentech Inc. DNA 94.2 93.72

General Mills Inc. GIS 52.6 47.22

Mutual Funds

Legg Mason Opportunity Primary LMOPX 3.99 3.9 3.37 4.11

T. Rowe Price Growth Stock PRGFX 18.54 17.75 16.99 18.34 18.57

Vanguard Short term bond index VBISX 10.18 10.24

Corporate Bonds

General Electric 36962G3H5 94.604 88.541 77.5 87 91.5

Coupon- 5.625%

Maturity- Sep 15, 2017

Semi annual

Pfizer 717081AR4 106.175 106.53 104.571 103.422 104.978

Coupon- 4.500%

Maturity- Feb 15, 2014

Semi annual

T- Bills/ Bonds

13 weeks 912795L66 0.325 0.3 0.28 0.208 0.208

26 weeks 912795Q95 0.47 0.495 0.44 0.417 0.406

30 years T- bond 912810QA9 99.264 99.257 99.258 96.7 97.23

Coupon- 3.500%

Maturity- Feb 15, 2039

Semi annual

Options

Rio Tinto PLC RJTDC.X 9.6 7.3 6.4 6.8


Strike- 115.00

BOUGHT CALL

JP Morgan Chase JSAOS.X 5.4 1.98 8.25 0.75


Strike- 22.50

BOUGHT PUT

Mc Donald's

MCDOJ.X Expire- March 20, 2009 Strike- 50.00 BOUGHT PUT

0.25 0.05

Investments CUSIP/ Ticker 27-Mar 3-Apr 10-Apr 17-Apr-09 24-Apr-09 1-May-09

61

Stocks

Johnson & Johnson JNJ 52.83 52.15 51.41 53.05 50.92 52.59

Wal-Mart WMT 52.57 53.8 50.66 50.2 47.87 50.05

Mc Donald's MCD 55.01 56.64 56.67 56.09 54.31 52.40

Family Dollar Stores FDO 33.63 31.9 34.33 32.82 32.79 32.14

General Mills Inc. GIS 50.85 50.86 50.84 49.86 48.73 50.48

Mutual Funds

T. Rowe Price Growth Stock PRGFX 19.9 19.99 20.39 20.6 20.83 21.11

Vanguard Short term bond index

VBISX 10.23 10.24 10.23 10.28 10.27 10.28

Corporate Bonds

General Electric 36962G3H5 90.685 87.579 90.775 89.921 89.881 89.616

Pfizer 717081AR4 104.87 104.074 106.413 105.8 105.777 107.048

T- Bills/ Bonds

13 weeks 912795L66 0.142 0.208 0.183 0.142 0.107 0.155

26 weeks 912795Q95 0.381 0.411 0.391 0.361 0.315 0.302

30 years T- bond 912810QA9 97.887 96.394 95.5203 94.572 93.282 90.0323

Options

McDonald's

MCDOJ.X Expire- March 20, 2009 Strike- 50.00 BOUGHT PUT

0.4 0.15 0.03 0.05 0.3 0.4

62

Appendix-2

Price calculations of T-bill, bond and FV of portfolio cash

63

T-bill (13-week)

Price= Face value- [1-0.01(discount rate)*days to maturity/ 360]

At Jan 30, 2009:

Face value 10,000Discount rate 0.150%Days to maturity 91 days

So, price was found to be $ 9,996.18

Bond (General Electric)

Price= PV of bond + accrued interest

Where, accrued interest for semiannual bond= Coupon rate/2 * 1000 * weeks from last coupon payment / 26 weeks

At Feb 20, 2009:

PV 946.04Coupon rate 5.625%Weeks from last coupon payment 22

So, accrued interest was found to be $ 23.7981

And thus, Price of bond was found to be 946.04+ 23.7981= $ 969.84

FV of portfolio cash

At Feb 6, 2009:

PV ( cash in hands at Jan 30, 2009) $ 98,860BCLR 2% ( 2/52= 0.0385% weekly)N 1 week

So, FV of cash at Feb 6, 2009 in portfolio was found to be $ 98,898

64

Appendix-3

Portfolio beta calculations

65

Stock

Beta of stock is BL; directly taken from any source. We have taken these figures from Yahoo!

Finance.

Bond

Bond’s beta BD shows the only risk related to company’s debt. So, it is the difference between

company’s levered beta and unlevered beta. To estimate this finance risk of the company, we

need to calculate unlevered beta and that is done by Hamada’s equation.

Hamada’s Equation: BL= BU [1+ (1-tax rate) LTD/ equity ]

To explain this, we have taken Pfizer’s bond into consideration:

LTD= $ 14,531 millions

Equity= $ 57,556 millions

Tax rate= 17%

BL= 0.68

Thus, Bu was found to be 0.562 and this gives rise to bond’s beta= 0.68-0.562= 0.118

Cash & government securities

They are considered to have beta of 0 as they are assumed to be risk free securities/ assets.

Portfolio beta

Portfolio beta is weighted average of individual securities beta calculated by above mentioned

procedures.

So, Portfolio beta= ∑ Wi * Bi ; that is found to be nearly 0.29

66

investment analysis final project

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