The State of South Carolina Investment Analysis and Portfolio Management FIN 3102 [C6] Group 1 Presenters: Alastiar Lee, Goh Sau Liang, Laura Nickles, Olivia Heng, Ronald Goh, Serena Huang
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The State of South CarolinaInvestment Analysis and Portfolio Management
FIN 3102 [C6] Group 1 Presenters: Alastiar Lee, Goh Sau Liang, Laura Nickles, Olivia Heng, Ronald
Goh, Serena Huang
Case Study: Overview1. Background
2. Analysis of Exhibit 1
3. Examining the risk and return of 30 Dow Stocks
4. Forming portfolios of various stocks in the Dow 30
5. Country bond and stock data analysis
6. Forming portfolios of various countries
7. Implications and Recommendations
BACKGROUND
• “South Carolina was the only state in the nation to disallow equity investments for its pension
funds.”
Allows up to 40% to be invested in
equities
Exclusively on U.S. Government
and Corporate Bonds
New Investment Policy
Old Investment Policy
•Higher Risk•Time Consuming•Long Recovery Time
•Possibility of Higher Returns•Risk Diversifications•Flexibility
Investing in the Stock Market
WHY AND WHY NOT?
PROS
CONS
2. Analysis of Exhibit 1
REAL RATES OF RETURN
• Adjustment for inflation
• Fisher’s Equation:
• Better reflects the percentage change in buying power
ARITHMETIC MEANS RETURN
• The average of the sum of the returns
• Tells us the return in an average year over a particular period
• Arithmetic return for T-bills = 0.94%
GEOMETRIC MEANS RETURN
• Calculated by:
• Tells us what one actually earns per year on average, compounded annually
MEANS & STANDARD DEVIATION OF ASSETS
RISK & RETURN RELATION FOR STOCKS & BONDS
RISK & RETURN RELATION
• Standard deviation is a measure of volatility
• There is a reward for bearing risk
• The greater the risk premium, the higher the risk
3. Examining risk & return of: DOW 30 stocks
Least Desirab
le
Most Desirab
le
COMPARIS
4. Forming portfolios of various stocks of the DOW 30
2-stock portfolio: Exxon & General Electric
Exxon General Electric
Arithmetic Mean
0.014461 0.020775
Standard Deviation
0.0036858 0.055978Covariance (Exxon/GE)
0.000841
Correlation (Exxon/GE)
0.407683
2-stock portfolio: Exxon & GEExxon
General Electric
Arithmetic Mean
1.4461% 2.0775%
Std Dev 3.6858% 5.5978%
Covariance (Exxon/GE)
0.000841
Correlation (Exxon/GE)
0.407683
Proportion of Exxon
Portfolio Mean Portfolio Variance Portfolio Std Dev
0% 2.0775% 31.3353% 5.5978%
10% 2.0143% 25.5982% 5.0515%
20% 1.9512% 20.5982% 4.5385%
30% 1.8880% 16.5773% 4.0715%
40% 1.8249% 13.4547% 3.6681%
50% 1.7618% 11.2305% 3.3512%
60% 1.6986% 9.9047% 3.1472%
70% 1.6355% 9.4772% 3.0785%
80% 1.5724% 9.9481% 3.1541%
905 1.5092% 11.3174% 3.3641%
100% 1.4461% 13.5850% 3.6858%
2-stock portfolio: Exxon & GE
Minimum Portfolio Variance - Exxon/GE Stocks
Proportion of Exxon
Proportion of GE
Portfolio Mean
Portfolio Variance
Portfolio Std Dev
69.7582% 30.2418% 1.6370% 9.4769% 3.0785%
*Value is obtained by constraining proportions invested in Exxon/GE to be bigger or equal to 0, to ensure that all weights are non-negative values
2-stock portfolio: GE & GMGeneral Electric
General Motors
Arithmetic Mean
2.0775% 1.0765%
Std Dev 5.5978% 7.6217%
Covariance (GE/GM)
0.01076
Correlation (GE/GM)
0.07621
Proportion of GE
Portfolio Mean Portfolio Variance Portfolio Std Dev
0% 1.0765% 58.0902% 7.6217%
10% 1.1766% 47.36675 6.8823%
20% 1.2767% 38.4316% 6.1993%
30% 1.3768% 31.2850% 5.5933%
40% 1.4769% 25.9268% 5.0918%
50% 1.5770% 22.3571% 4.7283%
60% 1.6771% 20.5758% 4.5361%
70% 1.7772% 20.5830% 4.5369%
80% 1.8773% 22.3786% 4.7306%
905 1.9774% 25.9627% 5.0954%
100% 2.0775% 31.3353% 5.5978%
2-stock portfolio: GE & GM
Minimum Portfolio Variance - Exxon/GE Stocks
Proportion of GEProportion of
GMPortfolio
MeanPortfolio Variance
Portfolio Std Dev
64.9598% 35.0402% 1.7267% 20.3559% 4.5118%
*Value is obtained by constraining proportions invested in Exxon/GE to be bigger or equal to 0, to ensure that all weights are non-negative values
PORTFOLIO CALCULATIONS
• 2 Asset Portfolio:
PORTFOLIO CALCULATIONS
• 5 Asset Portfolio:
PORTFOLIO CALCULATIONS
• 10 Asset Portfolio:
PORTFOLIO CALCULATIONS
• 30 Asset Portfolio:
COMPARING
PORTFOLIOSNo. of Stocks in Portfolio
Mean Return Std Dev (SD)Average Std Dev (Avg.
SD)
Difference (SD - Avg.
SD)
1 2.0775% 5.598% - -
5 1.0900% 4.3100% 10.4390% 6.1290%
10 1.2990% 4.1320% 11.3960% 7.2640%
30 1.4290% 3.8160% 7.3110% 3.4950%
Country bond & stock analysis
Country Stock AnalysisHighest Return
Lowest Return
Country Stock AnalysisHighest CV
Lowest CV
Country Bond AnalysisHighest Return
Lowest Return
Country Bond AnalysisHighest CV
Lowest CV
COUNTR STOCK VS LONG-TERM U.S. DATA
Highest Return
Lowest Return
COUNTRY STOCK VS LONG-TERM U.S. DATA
Lowest CV
Highest CV
COUNTRY STOCK VS LONG-TERM U.S. DATA
Highest Return
Lowest Return
COUNTRY STOCK VS LONG-TERM U.S. DATA
Lowest CV
Highest CV
STOCKS V.S. BONDS
6. Forming portfolios of various countries
Germany & Netherlands
Average Standard Deviation = 0.23900
GermanyNetherlan
dsPortfolio
Mean 0.17072 0.20940 0.19006
Std. Dev 0.27074 0.20233 0.22727
Stock Portfolio:
Bond Portfolio:
GermanyNetherlan
dsPortfolio
Mean 0.8997 0.10054 0.09525
Std. Dev 0.08596 0.08493 0.08430Average Standard Deviation =
0.08545
Germany & Japan
Average Standard Deviation = 0.24804
Germany Japan Portfolio
Mean 0.17072 0.09381 0.13227
Std. Dev 0.27074 0.22304 0.19585
Stock Portfolio:
Bond Portfolio:
Germany Japan Portfolio
Mean 0.8997 0.08700 0.08848
Std. Dev 0.08596 0.06664 0.7149Average Standard Deviation =
0.07691
Stock portfolio for all countries
PORTFOLIO: Mean = 0.17833; Std Dev = 0.19954
Australia Austria Belgium FranceGerman
yIreland Italy Japan
Mean 0.15993 0.13309 0.20269 0.19387 0.17072 0.23579 0.19954 0.09381
Std. Dev 0.24862 0.32984 0.20257 0.27027 0.27074 0.30178 0.35667 0.22304
Netherlands New ZealandSouth Africa
Switzerland UK US
Mean 0.20940 0.17482 0.20632 0.15936 0.18747 0.16978
Std. Dev 0.20233 0.38070 0.25380 0.24418 0.12026 0.13100
Bond portfolio for all countries
PORTFOLIO: Mean = 0.13022; Std Dev = 0.08252
Australia Austria Belgium FranceGerman
yIreland Italy Japan
Mean 0.16087 0.09694 0.14409 0.08997 0.15722 0.20952 0.08700 0.10054
Std. Dev 0.13480 0.07311 0.09096 0.08596 0.12423 0.20650 0.06664 0.08493
Netherlands New ZealandSouth Africa
Switzerland UK US
Mean 0.10054 0.14755 0.15591 0.05992 0.15516 0.13092
Std. Dev 0.08493 0.13626 0.13215 0.06500 0.13722 0.12729
7. Implications
Existing Investment PolicyProportion 33.33% 33.33% 33.33% 0.00%
Portfolio Returns
Real Rate of Return
Year T-Bills T-BondsCorporate
BondsCommon
Stock
1990 1.6021% 0.0660% 0.6314% -8.7456% 0.7665%
1991 2.4646% 15.7578% 16.3303% 26.6738% 11.5176%
1992 0.5928% 5.0049% 6.3071% 4.6356% 3.9683%
1993 0.1460% 15.0754% 10.1606% 7.0462% 8.4607%
1994 1.1980% -10.1685% -8.2108% -1.3246% -5.7271%
1995 2.7837% 28.1585% 23.8077% 33.7648% 18.2500%
1996 1.8293% -4.1134% -1.8583% 19.1154% -1.3808%
1997 3.5005% 13.9430% 11.0619% 31.1308% 9.5018%Expected Return 5.6696%
Standard Deviation
7.2583%
Coefficient of Variation
1.2802
New Investment Policy (with stocks)Proportion 20.00% 20.00% 20.00% 40.00%
Portfolio Returns
Real Rate of Return
Year T-Bills T-BondsCorporate
BondsCommon
Stock
1990 1.6021% 0.0660% 0.6314% -8.7456% -3.0384%
1991 2.4646% 15.7578% 16.3303% 26.6738% 17.5801%
1992 0.5928% 5.0049% 6.3071% 4.6356% 4.2352%
1993 0.1460% 15.0754% 10.1606% 7.0462% 7.8949%
1994 1.1980% -10.1685% -8.2108% -1.3246% -3.9661%
1995 2.7837% 28.1585% 23.8077% 33.7648% 24.4559%
1996 1.8293% -4.1134% -1.8583% 19.1154% 6.8177%
1997 3.5005% 13.9430% 11.0619% 31.1308% 18.1534%Expected Return 9.0166%
Standard Deviation
9.6048%
Coefficient of Variation
1.0652
New Investment Policy (stocks & international investments)
Proportion 12.00% 12.00% 12.00% 12.00% 12.00% 40.00%
Portfolio Returns
Real Rate of Return
YearInternational Bond
International Stocks
T-Bills T-BondsCorporate
BondsCommon
Stock
1990 6.9086%-
18.4997%1.6021% 0.0660% 0.6314% -8.7456% -3.0384%
1991 18.5180% 16.8204% 2.4646% 15.7578% 16.3303% 26.6738% 17.5801%
1992 13.9754% 0.4501% 0.5928% 5.0049% 6.3071% 4.6356% 4.2352%
1993 26.0596% 40.9612% 0.1460% 15.0754% 10.1606% 7.0462% 7.8949%
1994 -8.7197% -1.1574% 1.1980%-
10.1685%-8.2108% -1.3246% -3.9661%
1995 20.8600% 14.0301% 2.7837% 28.1585% 23.8077% 33.7648% 24.4559%
1996 12.0228% 17.9109% 1.8293% -4.1134% -1.8583% 19.1154% 6.8177%
1997 13.3197% 27.3085% 3.5005% 13.9430% 11.0619% 31.1308% 18.1534%Expected Return 10.6674%
Standard Deviation
10.2557%
Coefficient of Variation
0.9614
Recommendations• Stay out of the international market
• Is the higher yield of 1.65% justifiable?
• Foreign Exchange Risk
• Regulatory Risk
• Economic Risk
NO!
thank you!questions?
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