[ 18 ] Financial Markets

Tea m Pr oject 1. - Equity Analy sis

EXECUTIVE SUMMARY - (LESS THAN 1 PAGE -5 POINTS)

The executive summary is designed for someone who reads only the first page of the report. It
should present your principal findings and recommendations in a straightforward and easy-to-
read summary.

INTRODUCTION - (2 PAGES -5 POINTS)

You should provide the name and principal characteristics of the company and the environment
in which it operates; its relative size, market share, asset value, and importance in the industry,
principal difficulties it must overcome and opportunities it might seize over the next year or so.
Remember to cite your sources whenever necessary in the text or your report and provide a
complete list of references.

BETA CALCULATION - (2 PAGES - 10 POINTS)

Characteristic Line

Calculate the β coefficient (systematic risk) of the company. The calculation should rely on at
least 36 monthly returns on your company's stock and you should justify your choice of the
market proxy you use. The report should provide a high-low-close graph, a regression analysis, the
derived equation, a graph of the characteristic line, and a brief explanation and interpretation of
the results. Remember to include the R2 of your regression.

You should compare the β you calculate to the published β for your company and explain why
there might be a discrepancy.

The appendices should include the prices, dividends, and monthly returns you used to calculate
β and a complete list of references.

Security Market Line

The results of your calculations should be presented as a Security Market line. Explain how you
chose the proxy for the risk free rate and market return, and how you calculated your company's
expected return.

DIVERSIFICATION - (1 PAGE - 10 POINTS)

In this section you should propose an investment which might be used to diversify a portfolio
which has a significant position in your company; we are looking for a company who's returns
would be expected to correlate negatively with your company's returns.

To illustrate the effect of diversifying a portfolio as you recommend set up a hypothetical

portfolio which invests exclusively in your company's stock and calculate its average return (µ ),
risk (σ), beta (β), and R2 of the beta over the last three years. Set up a similar portfolio which
invests 50% in your company's stock and 50% in your recommended diversifying stock and
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examine the same statistics.

You should explain your rationale for choosing this stock as a diversifying investment and justify
your position using the portfolio statistics you calculated.

The appendices should include the prices, dividends, and monthly returns you used in calculating
the correlation between the two stocks.

CONCLUSION - (1 PAGE 5 POINTS)

Evaluate the systematic risk involved in the investment you analyze and make a recommendation
(sell, hold, buy, buy only for aggressive investors) for the stock you analyze. How representative
of future expectations is the data you analyzed.

SAMPLE RATE OF RETURN CALCULATIONs

Intel (INTC) pays quarterly dividends which must be incorporated into the rate of return
calculation.

Intel (INTC)
Month Closing Price Div Ex-date Return Explanation
Dec-95 56 3/4
Jan-96 55 15/64 0.040 30-Jan-96 -2.600%
Feb-96 58 13/16 6.478%
Mar-96 56 7/8 -3.294%
Apr-96 76 3/4 0.040 29-Apr-96 35.015% (76.75 + 0.04) / 56.875 = 1.35015
May-96 75 1/2 -1.629% (75.50) / 76.75 = 0.98371
Jun-96 73 7/16 -2.732%
Jul-96 75 1/8 0.050 30-Jul-96 2.366%
Aug-96 79 13/16 6.240%
Sep-96 95 7/16 19.577%
Oct-96 109 7/8 0.050 30-Oct-96 15.180%
Nov-96 126 7/8 15.472%
Dec-96 130 15/16 3.202%

Microsoft split 2:1 December 9, 1996

Microsoft (MSFT)
Month Closing Price Return Explanation
Sep-96 131 7/8 7.653%
Oct-96 137 1/4 4.076%
Nov-96 156 7/8 14.299% 156.875 / 137.25 = 1.14299
Dec-96 82 5/8 5.339% (2 * 82.625) / 156.875 = 1.05339
Jan-97 83 3/16 0.681% 83.1875 / 82.625 = 1.00681