IA Presentation final1

8/7/2019 IA Presentation final1

1/46

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

Wednesday, February 2, 2011


2/46

CASE STUDY: OVERVIEW

1. Background

2. Risk and Returns of T-Bills, Bonds and Stocks

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



3/46

BACKGROUNDSouth Carolina was the

only state in the nation to

disallow equity

investments for itspension funds.

Allows up to 40%

to be invested inequities

Exclusively on U.S.

Government andCorporate Bonds

NewInvestment

Policy

Old

Investment

Policy



4/46

Higher RiskTime Consuming

Long Recovery Time

Possibility of Higher ReturnsRisk DiversificationsFlexibility

INVESTING IN THE STOCK MARKET

WHY AND WHY NOT?

PROS

CONS



5/46

2. Risk & Return

on T-Bills, Bondsand Stocks



6/46

REAL RATES OF RETURN

Adjustment for inflation

Fishers Equation:

Better reflects the percentage change in buying power



7/46

ARITHMETIC MEAN RETURNS

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%



8/46

GEOMETRIC MEAN RETURNS

Calculated by:

Tells us what one actually earns per year on average,compounded annually



9/46


10/46

RISK & RETURN RELATION FOR:STOCKS & BONDS



11/46

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



12/46

3. EXAMINING RISK

& RETURN OF:

DOW 30 STOCKS



13/46

Least

Desirable

Most

DesirableWednesday, February 2, 2011


14/46

COMPARISON



15/46


16/46

2-STOCK PORTFOLIO:

EXXON & GENERAL ELECTRIC

Exxon General Electric

Arithmetic Mean 0.014461 0.020775

Standard Deviation 0.0036858 0.055978

Covariance (Exxon/GE) 0.000841

Correlation (Exxon/GE) 0.407683



17/46

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%



18/46

2-STOCK PORTFOLIO: EXXON & GE

Minimum Portfolio Variance - Ex on/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 propo

to ensure that all

rtions invested in

weights are non-

Exxon/GE to be bi

egative values

ger or equal to 0,



19/46

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%



20/46


21/46

PORTFOLIO CALCULATIONS

2 Asset Portfolio:



22/46


5 Asset Portfolio:



23/46


10 Asset Portfolio:



24/46


30 Asset Portfolio:



25/46

COMPARINGPORTFOLIOS

No. of Stocks inPortfolio

Mean Return Std Dev (SD)Average Std Dev

(Avg. SD)

1 2.0775% 5.598% -

5 1.0900% 4.3100% 10.4390%

10 1.2990% 4.1320% 11.3960%

30 1.4290% 3.8160% 7.3110%



26/46

COUNTRY BOND &

STOCK ANALYSIS



27/46

COUNTRY STOCK ANALYSIS

Highest Return

Lowest Return



28/46

COUNTRY STOCK ANALYSIS

Highest CV

Lowest CV



29/46

COUNTRY BOND ANALYSIS

Highest Return

Lowest Return



30/46

COUNTRY BOND ANALYSIS

Highest CV

Lowest CV



31/46

COUNTRY STOCK VS LONG-TERM U.S. DATA

Highest Return

Lowest Return



32/46

COUNTRY STOCK VS LONG-TERM U.S. DATA

Lowest CV

Highest CV



33/46

COUNTRY BOND VS LONG-TERM U.S. DATA

Highest Return

Lowest Return



34/46

COUNTRY BOND VS LONG-TERM U.S. DATA

Lowest CV

Highest CV



35/46

STOCKS V.S. BONDS



36/46

6. FORMING PORTFOLIOS

OF VARIOUS COUNTRIES



37/46

GERMANY & NETHERLANDS

Average Standard Deviation = 0.23900

Germany Netherlands Portfolio

Mean 0.17072 0.20940 0.19006

Std. Dev 0.27074 0.20233 0.22727

Stock Portfolio:

Bond Portfolio:

Germany Netherlands Portfolio

Mean 0.8997 0.10054 0.09525

Std. Dev 0.08596 0.08493 0.08430




38/46

GERMANY & JAPAN


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 0.7149




39/46

STOCK PORTFOLIO FOR ALLCOUNTRIES

PORTFOLIO: Mean = 0.17833; Std Dev = 0.19954

Australia Austria Belgium France Germany Ireland 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 Zealand South 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



40/46

BOND PORTFOLIO FOR ALLCOUNTRIES

Australia Austria Belgium France Germany Ireland 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 Zealand South 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

PORTFOLIO: Mean = 0.13022; Std Dev = 0.08252



41/46


42/46


43/46

NEW INVESTMENT POLICY (WITH STOCKS)

Proportion 20.00% 20.00% 20.00% 40.00%

Real Rate of Return

Year T-Bills T-Bonds Corporate Bonds Common 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



44/46

NEW INVESTMENT POLICYSTOCKS & INTERNATIONAL INVESTMENTS

Proportion 12.00% 12.00% 12.00% 12.00% 12.00% 40.00%

Real ate of Ret rn Portfolio

YearInternational

BondInternational

StocksT-Bills T-Bonds

CorporateBonds

CommonStock

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



45/46

RECOMMENDATION

Stay out of the international market

Is the higher yield of 1.65% justifiable?

Foreign Exchange Risk

Regulatory Risk

Economic Risk

NO!



46/46

THANK YOU!questions?

IA Presentation final1

Documents