Overview: In the first milestone, you prepared a client analysis. In this milestone, you will create the stock analysis and portfolio development sections of your

final project.

First, you must understand what you are investing in. You have to know the underlying characteristics of the investment. What type of asset is it? What type of security? How is it priced? What are the expected cash flows? Who are the typical investors and what are their typical motives? If you do not understand the answers to those questions, then the initial expectations you develop about the value and risk of the asset will be fundamentally flawed. This sets you up for missteps that can lead to underperforming your investment objectives.

Second, you must be able to estimate the value of the asset. Valuation is about assessing the estimated cash flows of the asset. This is a key component of discerning absolute return potential and the differences between competing assets. It has a significant influence on the third step in the process as well.

The third step is developing a thesis about an asset's expected return and the associated risk. This is accomplished by assessing your valuation estimates against the current market price and any developing economic or market dynamics that may impact your expected valuation or its pricing. The market is constantly changing, and these expectations need to be monitored on a regular basis to ensure they continue to correspond to the objectives you are trying to achieve.

Finally, you must understand how the assets in a portfolio interact with one another. It is likely that you will not have just one investment, so any additional assets will impact the overall performance of the portfolio. You want to formulate a plan to add assets that, when combined together, will have the potential to meet your objectives. Putting all of these steps together into a consistent, thorough process will position you to better meet the investment objectives laid out at the beginning.

Prompt: This milestone involves creating a draft of the stock analysis and portfolio development sections of the final project. Use the provided spreadsheet to calculate your portfolio's standard deviation and the Final Project Scenarios document.

Specifically, the following critical elements must be addressed:

II. Stock Analysis: In this section, you will select five stocks from the provided list and determine their values by applying an appropriate valuation model from the following options: price to multiple model (earning or sales), dividend valuation model, or free cash flow to equity valuation model.

Determine the value of each stock by using an appropriate model based on the characteristics provided for each stock; use each model at least once.

Provide a rationale for the stock valuation method you chose for each stock. Cite specific information to support your decisions.

Using the calculated valuation, the current market price, and historical performance, determine the expected return for each stock.

Portfolio Development: In this section, you will develop a portfolio for a client (Ezra or Jacob and Rachel) based on the client's risk tolerance, return objectives, and liquidity objectives. You will select appropriate assets from the provided list.

For the client, develop a portfolio from the list of assets provided that is informed by your analysis of the client's objectives and (if applicable) the stock valuation you determined.

Calculate the expected portfolio return using the CAPM (beta) model. Based on the risk tolerance and return objective of the client you didn't choose for this assignment, would you design an investment portfolio that has a higher or lower expected portfolio return, and why?

Calculate the expected portfolio standard deviation. Based on the risk tolerance and return objective of the client that you didn't choose for this assignment, would you design an investment portfolio that has a higher or lower expected standard deviation, and why?

FIN 340 Final Project Scenarios and Tables

You will use these scenarios and tables to complete the final project.

Client 1:

Ezra, age 26, is single. However, he is dating and preparing to get engaged. He will need roughly $5,000 for an engagement ring almost immediately, and expects he will need $10,000-$15,000 for the wedding in the next 12-24 months. He is currently employed and earns about $70,000 a year in salary. This salary is enough to cover all his taxes and normal living expenses of approximately $4,800. This leaves him with about $1,000 in savings each month ($350 to 401K, $650 to savings). He has been able to save roughly $15,000 to date in a 401K plan from work and about $20,000 in cash savings. His 401K plan has been invested 100% in the stock market, including some sector-specific funds. His other savings have been in interest-bearing savings and cash substitutes such as money market funds. He recently received a windfall of $60,000, and this prompted him to come to you for some advice. The following are few of Ezra's comments to help guide your thoughts:

"I understand I am young, so I need to take on as much risk as I can."

"I am willing to lose 30-40% on my invested capital if the return is commensurate."

"I do like to have a decent sized cushion in the bank in case something happens at my job."

"I don't foresee my risk tolerance changing after I get married."

5.

Client 2:

Jacob and Rachel, 53 and 52 respectively, are married with four children. Two of the children are currently in college, and two are in high school. They expect the other two children to attend college. The couple has done relatively well for themselves and earn roughly $275,000 before tax between the two of them, which equates to $190,000 after taxes. They live well below their means, and this should allow them to cover all of their children's college expenses out of pocket, but it will not leave much for them to save over the next six to eight years. Through savings and portfolio growth, they have managed to accumulate $900,000. To this point, they have been moderately aggressive (70-75% equities) with their portfolio, but they feel that they need to begin preparing the portfolio for partial retirement in eight years, and full retirement in 13 years.

"I know we still need to be somewhat aggressive?we could live until we're 90?so we need to plan for some growth even in retirement."

"We definitely can't afford to take a big hit in our portfolio. We don't have enough time to recover."

"Our jobs allow us to work part-time in retirement, and we will probably do so as long as we are able."

"What do bond yields look like today?"

"I think we'll need to draw on 3-5% of our portfolio in retirement. We'd like to earn enough income from the portfolio to cover that."

Excel File Edit View Insert Format Tools Data Window Help Q 8 Sun Apr 17 11:50 PM AutoSave OFF " G ... fin340_spreadsheet Q Home Insert Draw Page Layout Formulas Data Review View Tell me Share Comments A A ab Wrap Text v T V Paste BIUV $ ~ % 9 508 08 Conditional Format Cell Insert Delete Format Sort & Find & Analyze A = Merge & Center v Formatting as Table Styles Filter Select Data F25 X V fx D F G K M N P Q R S U V W Z AA Instructions: 1. Insert portfolio weights in the yellow highlighted area. D WN 2. Portfolio Standard Deviation is calculated below in grey below. Standard Portfolio 5 Deviation Weight 6 IBM 20.0% KO 13.0% 0% 8 BMY 28.0% 0% 9 ORCL 16.0% 0% 10 MMM 14.0% 0% 11 16.0% 0% 12 BIG 32.0% 13 NFLX 45.0%% 0% 14 AKAM $7.0% 15 GE 16.0% 16 SPY 11.0% 17 IWM 18.0% 18 EFA 15.0% 19 EEM 9.0%% 20 SHY 1.0% 21 IEF 6.0% 22 TLT 3.5% 23 LOD 6.0% 24 8.0% 25 26 Portfolio Standard Deviation 0.00% 28 29 30 33 34 35 36 37 Sheet1 Sheet2 + Ready + 100% 12,704 60 17 tv E