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Daniel is a part-time Starbucks barista and finance student. As a Starbucks employee, part of his wages was paid in form of RSUs (restricted stock unit)1. These RSUs, also known as Bean Stock will be turned into shares after the employee has worked for 2 continuous years in Starbucks. The reason behind the Bean Stock program is to "turn employees into partners" so that employees can "share in their financial success2 ." After the vesting period of 2 years, the employee can decide whether to keep the stock or sell the stocks. Daniel has kept his stock for the last 5 years. As a finance student, he knows the importance of the time value of money and investing early for retirement. One of the first things he learned was the risk and return concept. To make high returns he has to be willing to take some risk. He could put his money into a savings account or a money market, a very safe and liquid account, or he could take an extra risk and put his investment in the stock market. Since he already has Starbucks' stock, he decides that this is the logical move for him. However, he also learned that a rational risk investor will always invest in a diversified portfolio. He is thinking about investing in other companies to diversify his portfolio. By diversifying his portfolio, he can reduce risk that is inherent of investing in the stock market. As an investment novice who also has a financial constraint, he decides to look at a number of options. He decides to invest in GM, XPO, VZ, and SPY. General Motors (GM) is an American auto manufacture company who employs over 180,000 people in 5 continents3 . GM manufactures 8 different car brands, among them include Chevrolet, Buick, GMC and Cadillac. GM brands themselves as a technological innovator. GM is one of the first to "mass-produce an affordable electric car" and development of a self-drive car. They are also making headways to producing a cleaner car. Recently, however, GM has been in the news for discontinuing several models (mainly sedans) and laying off over 14,000 employees4 . This could however be more of a strategic move than a signal of weak performance. XPO Logistics Inc (XPO) is a logistic company that assists their customers with their supply chain and transportation needs5 . They help many companies with their online market space and makes sure that goods reach the attended customers. They have 1,529 locations in 32 countries and serve 50,000 customers. The continual growth of ecommerce means that XPO's service will remain relevant and necessary to those companies looking to enter the ecommerce space. Verizon Communication (VZ) is one of the largest telecom service providers. In 2017, Fortune ranked them number 166 . While Verizon is most known for their wireless products it also owns well known subsidies such as Yahoo and AOL, and has recently created a new subsidiary called Oath a media platform provider7 . Verizon also recently launched Verizon 5G Network, a faster internet, in selected cities8 . They plan to extend coverage to the rest of the nation in 2019. They will be the first company to provide 5G services to the public. Starbucks (SBUX) opened in 1971 in Seattle as a local coffee shop9 . Since than it has grown to over 24,000 stores in 75 different countries. Starbucks have over 30 coffee blends using highquality beans from Latin America, Africa, and Asia. Besides coffee, Starbucks also sells tea, fresh food, and other merchandise. Starbucks is known as one of the "World's Most Valuable Brand" according to Forbes as well as "Best Employer." Daniel believes in investing in what he knows. He owns a Chevy truck and is a Verizon customer. Furthermore, he recently became aware of XPO logistics and their importance in the online market space. Though he has financial constraints and want to receive the most out of his diversification benefit, he also decides to invest in SPY. SPY is the ticker symbol for SPDR S&P 500 ETF Trust. The SPY is an ETF that follows the S&P 500 Index. The S&P 500 is a marketvalue index that holds 500 of the largest companies that is listed in the NYSE or Nasdaq exchange. ETFs are similar to mutual funds that can be traded in exchanges. Daniel believes since he has financial constraint, holding SPY is a good way to diversify. He comes to you, an MBA student for help on quantifying his risk and return. Daniel wants to know the risk profiles of the different companies. Furthermore, he wants to know if the newly constructed portfolio provides the necessary expected return to compensate for his risk.

Assignment: Provide a quick rundown of Daniel's situation. Discuss strategies and goals of how he can "add value". Think about issues such as efficiency, risk-return, and how to add value. Include a recommendation of a portfolio make-up (weights, or even suggestions of other stocks).

1. Estimate and compare the risk and return of each stock and the SPY. Give the monthly and annual return for each stock (use videos to annualize monthly return). Which stock appears to be riskiest? How might the expected return of each stock relate to its riskiness?

2. If the portfolio was equally weighted (20% in all stocks and ETF) what is the resulting portfolio position (risk and return)? How does the variability of each stock affect the portfolio? How does this relate to your answer in question 1 above? How would the portfolio risk and return change if 50% of it is in SBUX, 20% in SPY, and 10% in each of the remainder securities. What is the correlation matrix between stocks? How does correlation play a part of portfolio construction?

3. Compute the "beta" for each stock. What does beta measure? (Use SPY as the measurement of the Market). How does the beta rank for each stock? How does this relate to your previous answers? What is the portfolio beta (for the equally weighed)? What does it indicate?

4. What is the required rate of return for each stock (CAPM)? What is the CAPM for the (equally weighed) portfolio? Explain the number and put it into context? (Use the average Risk-Free rate given below).

5. In what stock(s) (if any) should Daniel invest in? Make a recommendation of what you would do if you were Daniel. Do you have a different portfolio construction you would recommend? Why? Would you try something different?

Write this report in sections, make sure each section has a heading. The first section: Introduction/Summary Section 2: Risk and Return of each individual stock (Q. 1). Section 3: portfolio risk and return (Q. 2). Section 4: Market risk (Q. 3). Section 5: Expected Return (Q. 4). And finally, Section 6: Conclusion/Recommendation (Q. 5).

Table 1: Monthly Returns for Daniel's Portfolio and risk-free rate Date SPY SBUX GM VZ XPO RF 1/1/2014 -3.52% -9.26% -11.72% -2.28% -5.21% 0.04% 2/1/2014 4.55% -0.22% 0.33% 0.16% 26.16% 0.05% 3/1/2014 0.39% 3.41% -4.92% -0.02% -6.46% 0.05% 4/1/2014 0.70% -3.76% 0.17% -1.77% -7.72% 0.03% 5/1/2014 2.32% 3.71% 0.29% 8.10% -7.41% 0.03% 6/1/2014 1.58% 5.65% 4.97% -2.06% 13.89% 0.04% 7/1/2014 -1.34% 0.39% -6.83% 3.05% 7.93% 0.03% 8/1/2014 3.95% 0.17% 2.90% -0.13% 0.26% 0.03% 9/1/2014 -1.84% -3.02% -8.22% 0.34% 21.63% 0.02% 10/1/2014 2.36% 0.13% -1.69% 0.52% 5.97% 0.02% 11/1/2014 2.75% 7.48% 6.46% 1.80% -3.11% 0.02% 12/1/2014 -0.80% 1.03% 4.43% -7.53% 5.69% 0.03% 1/1/2015 -2.96% 6.68% -6.56% -2.29% -10.00% 0.03% 2/1/2015 5.62% 6.81% 14.38% 9.46% 20.01% 0.02% 3/1/2015 -2.01% 1.29% 0.51% -1.66% 2.99% 0.03% 4/1/2015 0.98% 4.71% -6.51% 3.72% 6.66% 0.02% 5/1/2015 1.29% 4.80% 2.60% -0.88% 1.36% 0.02% 6/1/2015 -2.49% 3.19% -7.34% -5.72% -8.10% 0.02% 7/1/2015 2.21% 8.04% -5.46% 0.39% -4.05% 0.03% 8/1/2015 -5.36% -3.42% -6.57% -0.51% -19.03% 0.07% 9/1/2015 -3.80% 1.59% 1.97% -5.43% -32.11% 0.02% 10/1/2015 9.03% 10.08% 16.29% 7.75% 16.49% 0.02%

To illustrate how such a fund might work, suppose we're in the midst of a precious metals boom. The promoters sell shares of stock in the "Pot of Gold" (POG) closed-end fund through brokerage firms, paying 8 percent of the proceeds to these firms and their sales forces. Investors buy ten million shares at $10 a share, for proceeds of $100 million less 8 percent, netting $92 million, which the managers of POG invest in listed gold stocks. Each share, originally costing $10, now represents $9.20 worth of stock, which is its net asset value (NAV) per share. The "sell side," the Wall Street promoters, have just captured 8 percent of the money. Notice that an investor could have bought gold stocks directly and, for each $10, owned $10 worth of stock. The shares of POG begin trading in the marketplace. Investors who are optimistic about the skills of management could bid these shares up to $11, $12, or even more, despite the NAV remaining at $9.20. Over time both the market price of POG shares and their NAV (the value per share of the underlying assets held by POG) will fluctuate. Any price for POG above NAV is called a premium to NAV and any price below NAV is a discount. One more thingNAV represents the liquidation value of POG shares but, as long as management controls the fund, they are worth substantially less. That's because management collects fees and incurs expenses, thereby reducing the benefits of ownership for the shareholders, compared with an investor who owns the underlying portfolio directly. Because of management's costs and fees, closed-end funds typically trade at a discount to net asset value. If management's fees and expenses tend to run at, say, 15 percent of the wealth being created by the underlying portfolio, then the shareholders might expect 85 percent of the future stream of benefits, so a fair price to pay ought to be 85 percent of NAV, or a discount of 15 percent. In the case of POG, the first investors pay $10 per share. Wall Street's selling charges cut this to $9.20. Then management takes 15 percent of future earnings, which reduces the value to the investor by another 15 percent, leaving a value per share for him of 85 percent $9.20 or $7.82. He's immediately lost $2.18 of his $10 or 21.8 percent of his investment to his helpers. It's like having a brand-new car depreciate as soon as you drive it off the lot. As time passes, the market price, as a percentage of NAV, fluctuates and the pattern varies from fund to fund and with overall market conditions. I've seen discounts of 50 percent and premiums of 80 percent. To exploit this, an investor can seek to buy funds at deep discounts, relative to their histories and to that of comparable funds. You can also sell short shares of funds trading at a high premium. Depending on their makeup, the long and short funds in your portfolio might hedge each other to some extent, with futures and options providing additional risk-offsetting possibilities. The returns from such a strategy can be fairly steady, but the long "workout" periods, during which premiums or excessive discounts tend to disappear, can make them modest. I once invested for a few years in an intelligently managed hedge fund that used this approach. Because of the slowness with which the mispricings diminished, our annualized return was 10 percent instead of the 15 percent we hoped for. If POG was trading at a 40 percent discount with shares at $6 each and an NAV of $10, we could attempt to buy enough shares to force and win a vote to convert the fun...

The first dealer offers new Ford sedans for $9,000, plus a $2,000 rebate payable in six months. The second dealer offers the identical new Ford sedans for $14,850. Everyone who drives up can see both prices on huge signs. The higher-priced dealer has balloons flying over his lot and a band playing. The lower-priced dealer does a brisk business but the higher-priced dealer is mobbed. Most of our "rational" investors prefer to pay too much. Nuts? Not possible? It happens often. For instance, in the next example the $9,000 Ford plus a $2,000 rebate is like 100 shares of 3Com and the identical Ford for $14,850 is like 135 shares of PalmPilot. Now for the details. Famous for its PalmPilot handheld personal organizer, the company 3Com, with stock market ticker COMS, announced that it was spinning off its PalmPilot division as a separate company. Some 6 percent of PalmPilot, ticker PALM, was offered to the public in an initial public offering at a price of $38 per share on Thursday, March 2, 2000. By the end of the day the 23 million shares that had been issued changed hands more than one and a half times, for a one-day trading volume of 37.9 million shares. The price peaked at $165 before closing at $95. The portion of PalmPilot sold in the IPO was deliberately set well below demand and led to a buying frenzy and price spurt typical at the time for tech stock IPOs. So far, this just repeated what we had often seen during the previous eighteen months of the tech stock boom. Now for the market inefficiency. At Thursday's closing the market priced PalmPilot at $53.4 billion, yet it valued 3Com, which still owned 94 percent of PalmPilot, at "only" $28 billion. But that means the market valued 3Com's 94 percent of PalmPilot at $50 billion, so it valued the rest of 3Com at negative $22 billion! Analysts, however, estimated the value of the rest of 3Com at between $5 billion and $8.5 billion. And within six months or so, 3Com intended to distribute these PalmPilot shares to its shareholders. Anticipating this, my son, Jeff, had called me a few days earlier to mobilize capital for this possible opportunity. You could buy PALM directly in the IPO (to get IPO stock you had to be "connected") or at wildly gyrating, much higher prices in the "aftermarket," when it began trading. Or you could buy PALM indirectly by buying COMS and waiting a few months to get 1.35 shares of PALM for each share of COMS owned. Moreover, you would also have a share in the post-spin-off business of 3Com, which was profitable and would have $8 cash per share. Jeff estimated the stock would then have had a value of $15 to $25. Analyst's note: Jeff's estimate of 135 shares of PALM to be distributed for each 100 shares of COMS was deliberately conservativea "worst-case" choicecompared with the typical "street" estimate of 150 shares. T