Fatima ShaikhQv3949

3/13/2015Corporate Finance

Fung

Investment Simulation Experience

Investment ObjectivesFor the investment simulation in corporate finance this quarter I

wanted to learn about corporate finance and do well in the class rankings which consisted of beta/alpha, portfolio worth, and Sharpe ratio. My highest achievement was being first rank for Sharpe Ratio, and thus being honored as a savvy investor. Currently, I moved up a lot in portfolio worth and beta/alpha both from 20ish to 12th. I wanted to have fun as I learned about investing in the stock market. I also wanted to impress my dad with my skills so that he will let me use his real money to invest in the stock market with him after he retires.

I wanted to stick with large companies with solid good reputations. I like having a personal connection to the stock that I buy, so I buy stocks of companies that I know about. I also diversified across different industries and bought ETF and a treasury bond and kept some T-bills in my portfolio so that I could apply the CML and efficient frontier. For the investment simulation, I wanted to have fun and do thorough preparation of the stocks I buy. And I accomplished this very well!

Equity Investment Strategies with Applications of Corporate Finance Theories and Financial Analyses

Investment Strategy and Portfolio Construction

I picked large company stocks that had good reputations. One good reason is that large firms are more transparent and have less information asymmetry. I especially emphasized the beta value because I am risk-averse. A beta of 1 means that the stock is as risky as the rest of the stock market. A beta of more than 1 means that the stock is riskier than the rest of the stock market. A beta of less than 1 means that the stock is less risky than the rest of the stock market. I preferred stocks with betas less than 1, preferably as low as possible (however this also means that the returns will also be lower). Additionally, because I am risk averse, it is important to note that beating the stock market is not my cup of tea, so I do not pay much heed to the alpha statistic.

Naturally being in the Silicon Valley, I have been exposed to many high tech companies by name, so this is what mainly composed my portfolio. Thus, my portfolio is composed with the likes of Google, Microsoft, IBM, Apple, Intel and Facebook. I also tried to diversify, or put eggs in one basket, and then put eggs in a totally different basket by adding companies such as International Flavors and Fragrances, Kimberly Clark, Walt Disney Company, Exxon Mobil, Pfizer, a Treasury bond, and Walmart.

I also emphasized the Return on Assets (ROA) figure, because I think it is important for a company to be efficient. To be really good, the ROA should be around 10%. I looked for ROAs in this ballpark (reasoning as to why I picked the stocks I did and the ratios used in these decisions are in the Appendix.)

Unique FeaturesI have a lot of high tech companies (see above section) and tried to

diversify into other companies. Pfizer is one biotechnology firm, Walmart is another different area, I have a treasury bond, iRobot is not as well known as the rest of my stocks but I own one and am fascinated with it so I have a personal connection to the company, I have an oil ETF and also invested in

Exxon Mobil. I have a very strong emphasis on the beta value, which other investors may not have. At the point in time when I bought the iRobot stock, quarterly earnings growth was 194.40%, but I was vary of the 1.71 beta so I invested less than I typically do. Most people also do not have one million dollars to invest in the stock market so I was not very particular about the costs of the stocks.

Financial Analyses, Theories and Analytical Tools ApplicationSome investors like to take risks when they invest in the stock market.

After all, the common saying high risk yields high returns. But I am risk-averse. However, I do not like being so risk-averse so I try to push myself out of my comfort zone and take a risk or so now and then. When I was doing the simulation, if there was a statistic that was off but I felt the pros of buying the stock outweighed the bad, I would push myself to buy it. If I invested with real money I predict I may become more risk averse, which I believe is not good because I also want to benefit from the high returns that unfortunately come with high risk.

Beta is an excellent statistic for the risk takers and the risk averse, but I must say it is a godsend for someone who is afraid of taking risks. I am in love with this financial statistic. But now that I have used it so much, I am getting curious about it’s “opposite” alpha which measures by how much you “beat” or outsmarted the market.

I made an effort to diversify my portfolio. My portfolio is composed with the likes of Google, Microsoft, IBM, Apple, Intel and Facebook. I also tried to diversify, or put eggs in one basket, and then put eggs in a totally different basket by adding companies such as International Flavors and Fragrances, Kimberly Clark, Walt Disney Company, Exxon Mobil, Pfizer, Walmart, and a Treasury bond. As you can see, I diversified across different industries. I also diversified in types of financial instruments by buying an oil ETF, a bond, keeping some T-bills, as well as buying traditional stocks so that I could

apply the CML and efficient frontier. I picked large companies because they are more transparent and have less informational asymmetry.

Equity Trading Strategies Based on Corporate Finance Events

I got tipped off on iRobot’s performance when I read the headline that they topped quarter 4 earnings on strong home robots demand (http://finance.yahoo.com/news/irobot-tops-q4-earnings-strong-150003288.html) I decided to buy the stock because of its high demand and impressive quarterly earnings growth of 194.40%. I also wanted to invest because of reading about how robots are set to pervade daily life in the upcoming years, and I have seen iRobot become fairly popular in my friends’ houses.

I came across an article on Yahoo Finance that showed me how well Apple is doing by saying that Apple became the first US company to close with a market cap above $700 billion (http://finance.yahoo.com/news/apples-market-cap-tops-710-210234828.html). This indicated to me that they were doing very well so I bought the stock.

Finally I bought XOM Exxon Mobil and an oil ETF. I had heard news of oil gas prices dropping because of the political situation with Russia/Ukraine/US. Then I also came across an article that said that an oil-price rebound was predicted (http://www.wsj.com/articles/demand-for-opec-crude-will-rise-this-year-says-group-1423482563) I bought the stock so I could buy low and sell high.

Performance Evaluation, Learning Outcomes, and Conclusion

Performance EvaluationMy highest achievement was being first for Sharpe Ratio, and thus

being honored as a savvy investor. Currently, I moved up a lot in portfolio

worth and beta/alpha both from 20ish ranking to 12th ranking. It makes sense that I would do good for Sharpe Ratio because I weighed the ratios and statistics very carefully for every stock I bought. But once I got first in Sharpe Ratio, I wanted to move up in portfolio worth. And I did! I made a drastic jump from 20th to 12th as I mentioned previously. My portfolio made 0.54% return, 0.22 Sharpe ratio, 0.09% Alpha, and 0.16 beta. Below are some more explicit information about my portfolio and its performance:

Transactions

Trade Date

TransactionType/Security

Symbol Company Name QTY

Price Comm.*

Amount* Curr./Exch

3/4/2015

12:00 AM

Dividends Equities KMB Kimberly-Clark Corporation 200 200@0.88 0.00 176.00 USD

2/17/2015

9:56 AM

Market - Buy Equities IFF International Flavors & Fragrances Inc.

250 116.53 -10.00 -29,132.50 USD

1.00

2/13/2015

9:33 AM

Market - Sell Equities NFLX Netflix Inc. -10 457.52 -10.00 4,575.20 USD

1.00

2/12/2015

9:36 AM

Limit - Buy Equities KMB Kimberly-Clark Corporation 200 109.45 -10.00 -21,890.00 USD

1.00

2/12/2015

9:35 AM

Limit - Buy Equities VZ Verizon Communications 100 49.82 -10.00 -4,982.00 USD

1.00

2/11/2015

7:00 PM

Market - Buy Bonds B-T-0.375-15062015 T-NOTE 0.375% 15-Jun-2015 20 1,001.70 -10.00 -20,045.51 USD

1.00

2/11/2015

9:41 AM

Limit - Buy Equities XOM Exxon Mobil Corporation 100 90.05 -10.00 -9,005.00 USD

1.00

2/11/2015

9:35 AM

Limit - Buy Equities FB Facebook Inc. 200 75.15 -10.00 -15,030.00 USD

1.00

2/11/2015

9:35 AM

Limit - Buy Equities DNO United States Short Oil Fund LP 250 57.83 -10.00 -14,457.50 USD

1.00

2/9/2015 Limit - Buy Equities PFE Pfizer Inc. 100 32.86 -10.00 -3,286.00 USD

9:41 AM 1.00

Portfolio Stats

Historical Day   

Cash Balance $844,153.40

Short Sale Proceeds $0.00

Loan Balance $0.00

Interest Earned on Cash $4,633.01

Interest Charged on Loan $0.00

Total Mark to Market Value for Futures $0.00

Restricted Funds $0.00

Margin Requirements $0.00

Total Margin for Futures $0.00

Market Value of Long Positions

$161,253.58

3/14/2015 Go

Trade Date

TransactionType/Security

Symbol Company Name QTY Price Comm.* Amount* Curr./Exch

2/9/2015

9:35 AM

Limit - Buy Equities INTC Intel Corporation 100 32.99 -10.00 -3,299.00 USD /1.00

2/9/2015

9:35 AM

Limit - Buy Equities IRBT iRobot Corporation 50 30.84 -10.00 -1,542.00 USD /1.00

2/9/2015

9:35 AM

Limit - Buy Equities MSFT Microsoft Corporation 100 42.22 -10.00 -4,222.00 USD /1.00

2/9/2015

9:34 AM

Limit - Buy Equities AAPL Apple Inc. 100 118.58 -10.00 -11,858.00 USD /1.00

2/9/2015

9:34 AM

Limit - Buy Equities WMT Wal-Mart Stores Inc. 100 87.08 -10.00 -8,708.00 USD /1.00

2/9/2015

9:34 AM

Limit - Buy Equities IBM International Business Machines Corporation

50 156.00 -10.00 -7,800.00 USD /1.00

2/5/2015

12:00 AM

Dividends Equities AAPL Apple Inc. 100 100@0.47 0.00 47.00 USD /

2/4/2015

9:33 AM

Limit - Buy Equities NFLX Netflix Inc. 10 455.50 -10.00 -4,555.00 USD /1.00

2/4/2015

9:33 AM

Limit - Buy Equities GOOG Google Inc. 10 529.53 -10.00 -5,295.30 USD /1.00

Accrued Interest Earned on Bonds $17.88

Market Value of Short Positions

$0.00

Net Market Value of all Positions

$161,253.58

               Portfolio Value $1,005,406.98

Percentage Return

0.54%

Buying Power $1,869,576.50

Trades Made/Allowed

17/10000

SPY ETF % Return 0.19%

SPY ETF at start date

205.43

Current SPY ETF 205.83

      

Learning Outcomes I think focusing on beta definitely paid off and pointed out solid

companies, but I am getting curious about alpha and portfolio worth as my next steps. The stocktrack user htroung showed me it’s possible to be ranked first in all three categories of portfolio worth, alpha/beta, and Sharpe Ratio which gives me inspiration and is revelatory to me because I would have thought that being the top in all three aspects would be contradictory. I now want to aspire to this amazing level of excellence and results, but I still believe that my stock simulation experience was a definite positive stepping stone.

Conclusion

One key finding I made is that investors shouldn’t buy stocks just based on the hype around the company-they should intelligently review the financial information about the company as well. When I bought Netflix the hype around this company clouded my judgment and made me shrug aside some pretty bad statistics, and this experience taught me that lesson. Another finding is that it takes time for a portfolio to show results. I think a key learning outcome I have made is that stock trading is really fun and worthwhile, and that I should push myself more to take more risks so that I can gain higher returns. Another key learning outcome is that I have gained more curiosity and enthusiasm at taking this experience further such as by keeping up with company/stock news for investing and engaging my curiosity to learn more about companies so that I can invest intelligently with them. Now that I have more knowledge about investing and find it fun I hope my dad hires me as his financial consultant; his financial consultants make too much money off of him.

Appendix

Reasons I bought Stocks for the Reasons I Did

17. International Flavors and Fragrances

Showed strong growth in graph for one year period which also shows up in the 52 week figures. Return on assets is over 10%, which is really good. Beta is less than 1 so is less risky than market. Current ratio is not favorable, but pros outweigh the cons.

Return on Assets (ttm): 10.68%

Beta: 0.66

52-Week Change3: 18.15%

S&P500 52-Week Change3: 13.04%

Negatives:

Current Ratio (mrq): 3.31

International Flavors and Fragrances (IFF) Stock Rose Today on Strong Earnings at TheStreet(Thu 4:19PM EST)

16. Sold Netflix stockSeemed to be error to buy this stock. The ROA is really low, and the beta is not that good either. Also, the stock isn’t doing so well.

Return on Assets (ttm): 4.04%

Beta: 1.43

15. Kimberly Clark (KMB)Forward P/E about 15. Beta shows less risky than market because it is below 1.

Forward P/E (fye Dec 31, 2016)1: 17.66

Beta: 0.67

14. Walt Disney CompanyForward P/E about 15. 52 Week change shows impressive positive growth. Quarterly Earnings growth also positive and impressive.

Forward P/E (fye Sep 27, 2016)1: 18.42

52-Week Change3: 30.77%

S&P500 52-Week Change3: 13.04%

Qtrly Earnings Growth (yoy): 18.60%

13. Verizon CommunicationsVery low beta-means it’s less risky than the market. Decent P/E. It’s 52 week change shows growth in the stock.

Beta: 0.24

Forward P/E (fye Dec 31, 2016)1: 12.80

52-Week Change3: 5.28%

S&P500 52-Week Change3: 13.04%

12. FacebookReturn on assets over 10%; is really good. Beta is less than 1 so not as risky as market, which is also good.

Return on Assets (ttm): 10.72%

Beta: 0.85

10. XOM Exxon Mobil, and 11. Oil ETFBased on the news of oil gas prices dropping because of Russia/Ukraine/US, and in the prediction that they will rise again.

Oil-Price Rebound Predicted: http://www.wsj.com/articles/demand-for-opec-crude-will-rise-this-year-says-group-1423482563

9. Treasury bond June 2015Diversify portfolio.

8. Pfizer

Diversify portfolio, well reputed company.2/8: Forward P/E is about 15. Beta is about 0.75, which means it is not as risky as the market.

Forward P/E (fye Dec 31, 2016)1: 14.94

Beta: 0.75

7. Intel2/8: ROA is very good; about 10%. Return on Assets (ttm): 10.61%

6. iRobot2/8: quarterly earnings and revenue growth is very good. Invested 50 instead of 100 because of high Beta.

Qtrly Earnings Growth (yoy): 194.40%

Qtrly Revenue Growth (yoy): 26.10%

Beta: 1.71

iRobot Tops Q4 Earnings on Strong Home Robots Demand - Analyst Bloghttp://finance.yahoo.com/news/irobot-tops-q4-earnings-strong-150003288.html

There is strong demand for these robot products. Good to buy.

5. Microsoft5/6: ROA is above 10%, which make this it really good. Beta is 0.79, meaning it is less volatile than the market.

Return on Assets (ttm): 10.88%

Beta: 0.79

4. AppleROA is really good, over 10%: is 15%. Current ratio in range from 1.0-1.25. Beta at market level.

Return on Assets (ttm): 15.22%

Current Ratio (mrq): 1.13

Beta: 1.06

News on APPLE: http://finance.yahoo.com/news/apples-market-cap-tops-710-210234828.html“Apple (AAPL) became the first U.S. company to close with a market cap above $700 billion on Tuesday. Apple's market value rose to $710.70 billion after the company announced that it had partnered with First Solar (FSLR) to build a $850 million renewable energy farm.Apple had touched the $700 billion level before, but never managed to settle there.”Apple doing good. Good to buy.

3. WalmartStatistics: from yahoo finance 2/5

Beta is low, which means it fluctuates less than the market. Forward P/E is near 15. Current ratio is about 1.

Beta: 0.29

Forward P/E (fye Jan 31, 2016)1: 16.66

Current Ratio (mrq): 0.92

2. IBM

2/4 2:31 didn’t purchase yet as of 2/5 3:17

Current ratio about 1.23. ROA about 10%. Beta less than 1 so is less risky than market, good for a high tech stock.Current Ratio (mrq): 1.25

Return on Assets (ttm): 9.50%

Beta: 0.88

Feb 3 at 7:15 PM

1. Netflix

I think beta higher than 1 is ok because it is a high tech stock.

Profitability

Profit Margin (ttm): 4.85%

Operating Margin (ttm): 7.32%

Management Effectiveness

Return on Assets (ttm): 4.04%

Return on Equity (ttm): 16.72%

Current Ratio (mrq): 1.48

Beta: 1.43

1. Google

ROA is almost 9% which is good. Beta about 1 so working about market.Management Effectiveness

Return on Assets (ttm): 8.52%

Return on Equity (ttm): 14.52%

Beta: 1.07