Securities and Investments graded project

The purpose of this graded project is to give you the opportunity to use the skills you’ve learnedthroughout this course in a series of real-world applications. The three parts of this project
require you to analyze portfolios containing a number of securities using a variety of analysis
tools. The skills you’ll demonstrate in this graded project are essential to becoming a successful
financial manager.
Record your answers in a Word document with the question numbers clearly labeled. Show your
calculations or calculator inputs when indicated for full credit. Perform all work using equations
and a calculator. Do not submit or use an Excel spreadsheet to calculate your answers.
• Develop the ability to perform investment calculations and analysis related to this course
Your project must be submitted as a Word document (.docx, .doc)
Part 1: Sector Performance
Investment managers strive to outperform both the sector they focus on and broad market
indexes such as the S&P 500. The performance of a portfolio is determined by both the
weightings given to different types of investments as well as the actual performance of these
investments. In addition, the level of risk an investor is willing to take on will impact the design
of a portfolio.
To answer the questions in Part 1, you’ll use the information provided about the portfolio in the
table below. The portfolio is broken out by sectors and shows the investor’s portfolio’s
weighting and performance and the S&P 500’s weighting and performance in each sector. The
final column shows the individual investments’ overall contributions to the portfolio. Note that
an investment can underperform the S&P and still have a positive contribution to the portfolio
based on the difference in weighting.
1. Fill in the missing values in the table above for a quarterly comparison of sectors with the
S&P 500 Index. Remember when performing calculations that the numbers shown are
percentage values. Record your answers as percentage values to two decimal places.
a. _______
k. _______
u. _______
b. _______
l. _______
v. _______
c. _______
m. _______
w. _______
d. _______
n. _______
x. _______
e. _______
o. _______
y. _______
f. _______
p. _______
z. _______
g. _______
q. _______
aa. _______
h. _______
r. _______
bb. _______
i. _______
s. _______
cc. _______
j. _______
t. _______
dd. _______
2. Did the performance turned in by the investment manager underperform or outperform
the S&P 500? By how much? Show your work.
3. Which sector turned in the greatest positive contribution to the portfolio’s performance?
Explain why this investment made the greatest positive contribution based on the
differences in weighting and the sector over- or under- performance.
4. Which sector made the greatest negative contribution to the portfolio’s performance?
Explain why this investment made the greatest negative contribution based on the
differences in weighting and the sector over- or under- performance.
Part 2: Portfolio Analysis
Use the three portfolios shown below to answer questions 5–8 in Part 2.
5. Based on beta, which portfolio has the highest level of systematic risk? Show your work.
6. If the risk-free rate is 5.5 percent, which of these portfolios has the highest reward-to-risk
ratio? Show your work.
7. Suppose that the risk-free rate is 5.5 percent, the return over three years for each portfolio
matches its expected return, and the portfolios have 3-year annual return standard
deviations as follows:
Portfolio 1
22%
Portfolio 2
26%
Portfolio 3
18%
If you were restricted to selecting one of the three portfolios to invest all your money in,
which should you choose based on that portfolio having the best ratio of excess return per
unit of total risk as measured by its Sharpe ratio?
8. Suppose that the actual returns for Portfolios 1, 2, and 3 were as follows:
Portfolio 1
11.3
Portfolio 2
12.5
Portfolio 3
9.4
Also, assume that the risk-free rate was 5.5 percent and the average return on the market
portfolio was 8 percent.
a. Which of the three portfolios has the highest Jensen’s alpha? Show your work.
b. Which has the highest Treynor ratio? Show your work.
Part 3: Selecting a Portfolio
Use the two portfolios shown in the tables below to answer the questions in Part 3.
Portfolio 1
Asset Category
U.S. small-company stocks
U.S. large-company stocks
International stocks
U.S. government bonds
U.S. corporate bonds
Percentage of Portfolio
5
10
5
50
30
Portfolio 2
Asset Category
U.S. small-company stocks
U.S. large-company stocks
International stocks
U.S. government bonds
U.S. corporate bonds
Percentage of Portfolio
20
30
25
15
10
9. In your role as a financial advisor, you’re advising a client, Sally, a 30-year old computer
programmer who makes an above-average salary. She’s investing money in her 401(k)
that she doesn’t plan to use until retirement. In your opinion, which of the two portfolios
above would be most appropriate for these funds? In your answer, explain why you
believe the portfolio you’ve chosen is appropriate and explain why the portfolio you
didn’t choose is not appropriate.
10. In your role as a financial advisor, you’re advising a client, Bob, who has just retired and
rolled over his 401(k) into a self-directed IRA account. Bob intends to use these funds to
provide income to live on in his retirement. In your opinion, which of the two portfolios
above would be most appropriate for these funds? In your answer, explain why you
believe the portfolio you’ve chosen is appropriate and explain why the portfolio you
didn’t choose is not appropriate.