At the beginning of the trading period, Team JHMS was given $5,000,000 to invest in various stocks, bonds, and mutual funds we felt would be quality short and long term investments. We first analyzed multiple different trading strategies that we felt would yield the largest return possible. We came to the conclusion that the best way to make a good return was to buy “low” and sell “high”. Each day we would monitor the fluctuations of the individual markets and when a particular market would have an off day we would look to invest. We researched high growth stocks with good track records, meaning stocks that have had steady growth over the past 5 years. We used Yahoo! Finance to do a lot of our research along with Charles Schwab. In terms of volume, we valued purchasing a higher volume of shares because with a less diversified portfolio there was greater possibility for return.
In total we purchased 12 equities, 2 mutual funds, and 2 bonds. During the entire trading period the economic growth around the world was substantial with the S&P 500, Dow Jones, and Nasdaq all reaching record highs. This reflected very positively on most of our investments, however we did lose a substantial amount of money on a couple of investments. We contribute this loss to the volatility of the two equities. Throughout the project, we stuck with our strategy of buying a high number of shares for each equity, mutual fund, and bond investment and it ended up yielding us more than a 1.4 percent return on our investments.
Analysis of Trades Executed:
As we explained above, we researched our investments through Yahoo! Finance as well as Charles Schwab. We also used these platforms to research prior returns of our investments as well as read expert opinions on stocks we were thinking of choosing. We backed up these opinions by researching the particular author of the stock article to make sure they were credible and had offered good recommendations in the past. We also followed specific news events around the world that could possibly have a negative or positive effect on the american economy. When first deciding which stocks, mutual funds, and bonds to invest in we assessed the economy as a whole and found that tech stocks were extremely hot and were experiencing exponential growth. Like we explained above, we looked at investing in the most solid/high growth companies. Overall, we believe we created a diverse portfolio with a high potential for return.
Below the following chart illustrates the 12 equity funds, 2 mutual funds, and 2 bonds our group chose and the detailed analysis of each particular one:
Equity Portfolio, Mutual Fund Portfolio, Bond Portfolio:
Above you will see our aggressive investing strategy at work. Throughout our investing time frame you will see our strategy of buying high volume of shares with almost all of our investments. We selected GOOGLE and APPLE as our tech stocks, as we felt they would produce the highest possible returns with the launch of their new products like the APPLE IPhone 8 & X, and the GOOGLE Home Mini. We also purchased 2 mutual funds and 2 bonds in an effort to diversify our portfolio and to hedge risk.
Behavioral Biases:
During the first few weeks of trading we purchased equities extremely aggressively. We definitely fell victim to choice paralysis. Choice Paralysis is when there are a plethora of choices and it ultimately affects overall decision making. Due to the lack of trading experience within our entire group we focused on trading the companies we were actually familiar with. This is why some of our bigger purchases were GOOGLE, APPLE, and CHIPOTLE. Toward the end of the trading period we realized that there are a ton of publicly traded companies out there with the potential for exponential returns. Overall, we wish we would have taken advantage of several other less known companies but we definitely learned from our mistakes. We also fell victim to herding bias. When talking with other groups and learning of their investments we also bought very similar investments as those groups.
Equity Analysis:
The three equities that we decided to analyze further were Apple (AAPL), Chipotle (CMG), and McDonald’s (MCD). We selected Apple and McDonald’s because those two were are best performing stocks, while Chipotle had the worst performance. Although McDonald’s is in the same industry as Chipotle, we chose this stock because it paid dividends over the last five years. We also analyzed the returns of all 3 stocks from the previous 5 years.
To begin, our highest performing stock MCD was original purchased at a price of $156.83 then rose to a current price of $172.28. McDonald’s had a price change of 9.85% which at 1000 shares, our portfolio value increased by over $15,000 in the past several months. Our next was Chipotle, this stock was purchased at $305.26 and later sold at a price of $276.60. This was a price change of $-28.66, causing a loss of more than -9.39%. We projected Chipotle to have a much better couple of months then they ended up having. They posted a substantial 3rd quarter loss causing the stock price to plummet. Our final stock was Apple. We purchased Apple at a price of $157.93. Currently Apple stock is trading at $169.80, which is a 7.50% return on our investment. This was achieved through the launch of a number of new Apple products.
When considering what equity’s to invest in we used the historical returns (5 years) on all 3 stocks I described above. All 3 stocks had extremely good historical returns, which led to us choosing all 3 company’s as investments. According to Yahoo! Finance, Apple’s historical return is an outstanding 161% since early 2013, McDonald’s is 79% during that time, and Chipotle’s, which is 2.8%.
Once we obtained the historical returns from the previous 5 years we were able to obtain other statistics from each stock including the standard deviation of returns, betas, and DDM. Below the following chart illustrates the standard deviation of returns on all 3 of our equity investments:
Symbol
Standard Deviation of Returns
AAPL
0.0686
MCD
0.038
CMG
0.086
Our results show that Chipotle has the largest standard deviation at 0.086 making it the most risky, while McDonald’s has the smallest at 0.038. We found the betas for all 3 equity’s with McDonald's at 0.82, Apple at 1.34, and Chipotle at 0.15. Beta measures the volatility of a stock. A beta less than 1.0 means the security is less volatile than the market and vice versa. Based on our analysis Apple is the most volatile with a beta of 1.34, and Chipotle the least with a beta of 0.15.
CMG
APPL
MCD
Intercept
0.010223
Intercept
0.00686
Intercept
0.005482
X Variable 1
0.045207
X Variable 1
0.190981
X Variable 1
0.330755
The last part of the equity analysis was using the dividend discount model to predict the price of the stock based on dividends being paid out. We used Mcdonald’s stock for this analysis because it was one of the few stocks paying out dividends. We found that we were unable to use this model because the dividend growth of 6.3% was larger than the discount rate. After researching McDonald’s, we found the EPS was $5.88 and the P/E ratio was 29.03. Once we had
these numbers we were able to estimate the stock price, which was roughly the same as the current stock price.
Three-Stock Portfolio Analysis:
While performing the three-stock analysis we used (APPL), (MCD) and (BA). By performing an analysis of the three stocks under one “Portfolio” we were able to see how they work together.
By creating a portfolio with multiple stocks in different industries we can reduce company specific risk. As we looked at the stocks that we chose during the simulation we wanted to pick stocks that were different from one another. By comparing the stocks, we were able to find the correlation matrix of the portfolio which is shown below:
Price
Beta
Price
1
Beta
0.533249
1
By finding the portfolio beta we are able to calculate excess return. Portfolio Beta = .36(.68238)+.287(1.2475)+.35(1.20555) = 1.03. Using the CAPM model for expected return we can use the beta presented above. With a T-Bill rate (the one year note) of 1.62% and an assumed market return of 12% we calculated our portfolio’s expected return to be 12.31%. Now that we have an expected return of 12.31% we can calculate the actual return and then ultimately find the excess return. While looking at the combined returns of our three stocks we found that they all performed extremely well. With a weighted average portfolio return of 8.18% we calculated our portfolio’s excess return to be -4.13%, while not ideal we are still making a return on the three stock portfolio
Sharpe Ratio
The sharpe ratio allows us to see the optimal way to structure our portfolio so that the risk taken is worth the returns. Below are the computations we used to arrive at the highest Sharpe ratio of .285.
Bond Analysis:
For the bond analysis, we chose American Express and Goldman Sachs Group Inc. bonds to be in our portfolio. We found the bond information through Yahoo! Finance so that we were able to look more closely into the price, maturity, yield, and coupon of our two bonds. We were able to use the duration function in Excel to find the duration of our two bonds. The following chart shown below explains how we used the bond data to find the durations:
Bonds
Maturity Date
Amount
Price
Coupon
Yield to Maturity
American Express- 8.125%
May 20, 2019
100
1,086.12
8.13%
2.32%
Goldman Sachs- 5.25%
July 27, 2021
500
1,090.99
5.25%
2.85%
Duration
American Express
1.403030733
Goldman Sachs
3.321241234
Duration is considered to be the measure of the sensitivity of the bond price. The duration of a bond illustrates the weighted average of the time until each payment with weights proportional to the present value of the payments. Duration is known as the number of years. The bigger the duration, the higher the interest-rate risk or reward for the bond prices. We then computed the convexity of the bonds after further analysis. The convexity of a bond is very similar to duration because you calculate the price changes in bonds due to the rate change. It is important to know both of these so that you can be prepared for any possible interest rate changes.
Mutual Fund Recommendation:
The one stock mutual fund we really were high on was the Schwab S&P 500 Index Fund (SWPPX). This is a large blend/large cap fund and has assets totaling $30 Billion dollars, with over 23% of its assets within the information technology sector. This fund has an impressive 20% return on the year as well as a historical 5 year return of over 14%. This fund was rated 4 out of 5 stars by Morningstar Ratings. This mutual fund has an above average historical return and an average historical risk. We purchased 7,945 shares at $40.28 and with the fund currently trading at $41.34 we stand to make a profit north of $8,000. We identified this mutual fund through research on both Yahoo! Finance, MorningStar, and Charles Schwab. We were looking for a mutual fund with exponential growth, one that followed the S&P 500 (in order to somewhat hedge risk), as well as a fund that could make us some money over a longer period of time.
We ended up not purchasing any bond mutual funds because of our lack of knowledge with these particular funds. We also found out that bond mutual funds historically yield lower returns than stock mutual funds. This would have been against our trading strategy as we set off to make as much money as possible within the trading timeframe.
Lessons Learned:
In conclusion, we feel like we did well for our first time trading. Our total portfolio return was 1.35 percent, and our total earnings were $3,204,630. We would have liked these numbers to be higher, but like we said we were happy with it being our first time. We finished 10th in our class out of 20 groups with a total of $8,274,372. If we could go back to the beginning of the semester, we would have tried to do a better job with keeping up on current events to make smarter choices with our trades. We made decisions like going with big companies like Chipotle, who did not do as well as we expected. Since we are at the end of the semester and we now have a better understanding of investing as a whole, we would invest in smaller, newer companies that have a greater chance of having a higher return. Investing in newer companies comes with a higher risk than companies with history, which would have caused us to invest a higher percentage of money into funds that follow the S&P 500 in order to hedge the overall risk of our portfolio. Overall, we really enjoyed trading throughout the semester and feel like we are now more knowledgeable about the stock market.