DFMT

March 15, 2000

CONTENTS
Page Policy Statement.1-2 Stock Market..3 Portfolio Holdings..4-7 Changes In Portfolio..8 Sun Microsystems..9 Conclusion...10

Policy statement Investor type: Although we have attempted to behave as value investors, seeking for short-term, high risk, and high return investments, our individual nature has not allowed us to be consistent with that role. Considering our behavior we acted more like moderate investors. We have often sought stocks with low risk and, consequently, we earned low returns. Additionally, we have not aggressively invested in high risk stocks. Portfolio choice: The conservative nature of our investments is consistent with the choice of our portfolio. Stocks in a conservative portfolio would include firms with (1) long term profitability; (2) firms in mature industries consistently outperforming their industry counterparts; and, (3) low beta, compared to the industry. In hindsight the moderate nature of our investments has been stated earlier in our first paper where we wanted to invest in: Some blue chip companies which in the long term are going to be profitable We are going to take advantage of specific moments of each company. The first point shows that we were willing to invest to seek long term profits instead of only short term ones. The second relates to the low risk associated with firms that outperform their industry counterparts, be it at specific moments or consistently. Finally, companies such as WalMart, Intel, and Motorola, have low risk and, consequently, low beta. A firms beta coefficient determines the non-diversifiable market risk of the stock. The market risk is caused by general movements in the stock market, reflecting the fact that most stocks are systematically affected by macroeconomics events. The market risk is one of the two components that make up a stocks risk. The other component is the diversifiable risk, which is generated by random events unique to individual firms. Since the risk is unique to a stock it can be eliminated by combining negatively correlated stocks into a portfolio Diversification: Although the riskiness of a portfolio declines as the number of stocks in the portfolio increases, it is necessary to combine negatively correlated stocks to guarantee a lower overall risk of the portfolio. We have spent little time assessing how the individual stocks correlated against each other, which seem to have resulted in a portfolio with an overall high risk. Market research: A good market research is imperative to the choice of stocks composing a portfolio. Investment in any specific company should be conditional on knowing the company and being familiar with the industry it operates in. A few companies that we have chosen clearly outperform the market consistently namely: Motorola and Intel. These companies have proven to be good investments. Nevertheless, Yahoo had a negative return in the period considered, despite its good performance in the past. In fast paced volatile markets such as the internet, market research has to be updated

frequently. In such contexts, it is much harder to know whether a specific stock will be profitable or not. In the case of Yahoo the negative return in part is due to the fierce competition it has been facing from other e-companies, such as Google. Asset allocation: We have received $500,000.00 to allocate among different types of assets. Although we had option to invest in Bonds and Mutual Funds, we have opted to invest only in stocks. We have discarded the alternative of Bonds due to its low returns. And we have not considered the alternative of investing in Mutual Funds. The securities selected to our portfolio are a mix of high risk stocks and consistent low risk market over-performers. The graph with the returns of our stocks shows that they are negatively correlated, while some companies had a positive return others had negative returns. We didnt have a specific rule for the number of shares of each company, the decision on how to allocate the total investment amount depended most on the companys initial stock price. Companys with higher stock prices typically received lower investments. We kept high stakes in high priced, high risk stocks such as TRRA and VISX. They presented high losses in the period and contributed to our low final performance. We maintained an investment strategy of selling stocks that reached a value that was 10% higher than the purchase price. In retrospective we believe that such a strategy was a bad idea. We consistently sold stocks of firms making profit and to which we were familiar with to purchase stock from firms that we still had to learn about. First, such strategy limited our chances of profiting from stocks doing extremely well. The maximum return possible with our strategy was 10%. Second, it implicitly allowed that we kept stocks not performing well in the market instead of getting rid of them. Third, it raised the probability that we would select new stocks with lower profitability. Finally, all the market research performed for the stock that was sold was lost when we decided to take our chances on a new stock. Advice about the portfolio: After considering the choice of our portfolio and with the hindsight of its performance in the period considered, we do not believe that our portfolio is advisable. We feel that we failed to consider the alternative of investment in Mutual Funds. We have also not considered carefully the diversification of our securities. It is clear that we have negatively correlated stocks to minimize the risk of our portfolio correlate our portfolio, but we maintained high stakes in highly risky stocks that did not pay off.

Stock Market A stock is a part ownership in a corporation which in turn entitles you to part of the corporations earnings and assets. Corporations raise funds in order to finance their activities by issuing stock and selling it to the public. There are two types of stock: common stock and preferred stock. Common stocks gives voting rights to the shareholders, but it does not guarantee dividend payments. Preferred stocks provides no voting rights, however it must make dividend payments. Usually, common stocks prices are more volatile and riskier than preferred stock, but it provides a higher potential for growth. A stock market is simply an organized form of trading securities like common stocks, preferred stocks, bonds, etc and where the prices of firms stocks are established. There are two types of stock markets: organized exchanges, and the over the counter market. An organized exchange has physical locations that conduct public sales of listed securities. The two major American stock exchanges include New York Stock Exchange (NYSE), and the American Stock Exchange (AMEX). There are also several other stock exchanges throughout the world like the Philippines Stock Exchange and the London Stock Exchange. Conversely, an over the counter market does not have a physical location, but rather several brokers and dealers are connected electronically by telephones and computers that trade the unlisted securities. An example of over the counter market is NASDAQ which is known as the NASD Automated Quotation System. In terms of number of issues, the majority of the stocks are traded over the counter, and also the trading volume is higher than in the exchanges. Many large companies like Microsoft, Intel and MCI have chosen NASDAQ as their stock market. Overall, any economic or political uncertainties of the country, or the behavior of companies can affect the performance of the stock market. Therefore the stocks in general suffer from levels of volatility. As a consequence, the stock market performance has a major effect on peoples wealth and on firms investment decisions. To illustrate, then Thailand could not defend anymore of its currency (Thai baht) and had huge debt obligations along with the economic and political uncertainties, the Thai stock market went down about 70% ( the biggest downfall since 1994).

Portfolio Holdings: Motorola Motorola Incorporated, which has committed to creating innovative products and technologies, is a global leader that provides integrated communications and electronic solutions. The company manufactures and sells a diverse line of electronic equipment, and automotive and industrial electronics including software enhanced wireless telephone, two-way radio, messaging and satellite communications products and systems. For the 9 months, ended 10/99, net sales rose 7% to $22.43B. Net income totaled $468M versus a loss of $1.12B. This increase was due to the increased sales from Personal Communications Segment of the company. General Electric GE is one of the largest and most diversified industrial corporations in the world, whose products include appliances, lighting products, aircraft engines, and plastics. GE also provides television, cable, internet, distribution, engineering, and financial services. In addition, GE is committed to achieving worldwide leadership in each of its businesses, therefore, it operates in more than 100 countries around the world. Total revenues for the nine months ended 9/30/99, rose 10% to $78.78B. Net income rose 15% to $7.63B. Revenues reflect increased volumes of goods and services sold. Earnings also reflect an improved operating margin. Since GE is a solid and well-know company throughout the world which is the worlds third biggest company in market capitalization, behind Microsoft Corp and Cisco Systems, and that its stock has been increasing constantly, we decided to have GEs stock in our portfolio as a longterm investment. However, the Chairman and Chief Executive Jack Welch, who has been working for the company since 1981, is going to retire in April of 2001. During his 19 years of working for the company GEs market value has increased by more than $494 billion at the end of last year. Furthermore, Welch, last November, was named as ``Manager of the Century'' by Fortune magazine. With the acknowledgement of his retirement, the stock price had declined. Therefore, we decided to hold the stock, and we still strongly believe that the price of the stock will recover since GE still has a potential future growth. VISX VISX, Incorporated is a worldwide leader in the development of proprietary technologies and systems for laser vision correction. The VISX Excimer Laser System is their star product and is a fully integrated medical device that incorporates an excimer laser and a computer-driven workstation. Recently they announced earnings for the 3 months ended 12/31/1999,of $25,768,000. On February 23, Visx announced that they were going to reduce the price they charge for its laser correction technology to $100 from $250 per eye to attract more customers. Through this

strategy Visx wanted to "accelerate the growth of the LVC industry". As a consequence Visx share price dropped 25 percent, their shares went down $5.5 to close at $16.3125, which was their 52-week low. We thought that the market overreacted to the news, and it was an excellent opportunity to have fast earnings by buying and selling quickly. And we were right, the next day the share went up almost 11% and we sold. However we kept a moderate number of shares (1000) just in case the stock performed well. But in the last days those shares have depreciated and are returning a moderate loss of almost 2%. VerticalNet: VerticalNet, Inc. is an owner and operator of vertical trade communities, targeted business-tobusiness communities of commerce on the Internet that act as industry-specific sources of information, interaction and electronic commerce. We decided to buy this companys stock because the company seemed solid and because we thought of them as the typical Internet stock with very large growth potential. Furthermore Microsoft just invested $300 million in the company, which did not but reaffirm our opinion. We thought that the fact that Microsoft invested so much money in them would have both long term and short term repercussion on the price of their stock. There were many moments in which we thought about selling, especially two weeks ago when the market corrected the stocks upward trend and the price began to decline. But we did not sell and remained patient to see what would happen, we were confident on this stock and every day we thought of them as more of a longerterm investment. We were right, and today the stock has recovered almost 20% from 2 weeks ago and it is giving us a positive return of more than 11%. Yahoo! Yahoo! Inc. is a global Internet Media company that acts as web search engine, and offers a wide variety of information, communication and shopping services to millions of users daily. It is important to remark that Yahoo! Is the most visited web site of the world, which makes it also the more valuable .com Company of the world. They hold almost 70% of the web advertising. We knew that the Company was going to split its stock on February 14th , which we thought would raise its value in the long term. Until a few days ago, some people just thought of Yahoo! as an Internet portal that did show a profit. But recently the company has announced their first after tax earnings ever ($44,738,000), which boomed the share more than $30 up to a recent price of $183.25. We think that if the company keeps this path and avoids giving the market the only thing they fear from them, the lack of earnings, the price will keep on raising. Therefore we look forward to holding our position on this stock for the long term. Terra Networks: Terra Networks, S.A., a Spanish internet firm, provides Internet access and local-language interactive content and services to Spanish and Portuguese-speaking residential and small office/home office customers. The company is an affiliate of the Spanish telecom Telefonica,

S.A., and is the largest listed internet company in Europe. Recently they acquired Chevere, a leading website in Venezuela, which further strengthened their present position in Latin America. We are going to be patient with this stock and remain with it for the long term. We see enormous growth opportunities for this company. The markets in both Europe and Latin America, where Terra has a strong presence, have great upside potential for internet firms like Terra. Profits have yet to be realized for the company but revenues are up sharply. Even with the company's high P/B and P/S ratios our speculative position should show a high return in the long run. Citigroup: Citigroup is a leading provider of financial products and services whose primary market includes individuals, governments, and financial institutions. They are the parent company of several subsidiaries including Solomon Smith Barney, Travelers, and Citibank. Products include mutual funds, insurance, banking, and financial planning. The relatively large number of subsidiaries allow the company to diversify their risks to a certain extent. In addition, over the past several years financial stocks have seen record profits. This is primarily due to their high sales and market performance, both of which have increased assets under management substantially. Net income for Citigroup was up 46% for the nine months ended 9/30/99. The company also has a low P/E ratio of 17 in comparison to the S&P 500 average of 36. Although financial stocks have seen poor performance this year, with the company's strong ROE and their high dividend growth rate we feel this is a good investment for the long term. WalMart: WalMrt is a leading retailer of discount stores which offer a large array of products including apparel, domestics, fabrics, electronics, and automotive accessories. This blue chip company has a long history of producing strong earnings and high returns on investments. Nine months net income ending 10/99 was up 27% for the company. This was mainly attributed to store expansion and higher sales volumes. The company has consistently maintained a high return on equity while having a low beta and average P/E ratio. This year has been devastating for this companies stock. Investors fear that potentially rising interest rates would strongly hurt WalMart's earnings. Any increase in interest rates has the potential to hurt the earnings of any company. Due to WalMart's operations of discount stores it is believed that inflation would lower their earnings more than the average retailer. Since acquiring this stock in our portfolio we have seen it depreciate by 25.9%. Unfortunately our timing on when to purchase this stock was poor. However, the current position of this stock we feel is highly undervalued. Although potentially rising interest rates may hurt the companys future earnings, we do not feel that the current stock price correctly reflects it's intrinsic value. Therefore we will be maintaining a along term position on this stock.

Intel: Intel Inc. designs , develops, and manufactures computer components. This includes microprocessors, chipsets, and various network and communication products. We see great potential for this stock. The company has been able to maintain a very high gross margin of nearly 60% and a net profit margin of 25%. Net income for the 39 weeks ending 9/25/99 was up 30%. The company also has a low P/E ratio in comparison to the industry which enables us to expect higher possible returns on the stock price. Intel not only has high growth in earnings but is one of the few companies in this industry with a history of dividend payments.

Changes Made: Sun Microsystems On February 11th we decided to sell 600 shares of this stock , which now we realize was a bit precipitate. We needed some cash and it was one of the few companys that was offering us a profit of more than the 10% we chose as the minimum return on investment per stock, so we decided to sell it. Now from the retrospective we see that we made an error because, with the analyzing knowledge we have gained in the last months, we now think of them as a long term investment. Broadvision: Their stock price had been declining since we bought the shares so we got a bit impatient about this stock which we thought would given us revenues faster. So as soon it gave us a bit more than a 10% profit, we decided to sell. However we decide to maintain a 100 shares position out of the 300 we initially bought. We again did things in a precipitated way because the next day the stock went up an extra 12%, up to almost $211 per share, which meant a return on the initial investment of more than 26%, so now we decided to exit our position in this stock and take the profits. Motorola: Again impatience affected us. Since we did not gain any profits on the investment, as soon the stock gave us a 10% profit we sold it. We proved to be wrong because a few days later the stock went up an extra 15% from the price we sold, to almost $185. However in the last weeks the price has corrected and is now closer to the point when we sold and it continues to give us a 12% profit. We feel that the stock can continue to rise and that it will change the downwards trend that it is maintaining now, and as soon as we feel that the return is enough we will sell our remaining participation. Visx As stated before on February 23, Visx announced that they were going to reduce the price of their products. As a consequence Visx shares dropped 25 percent, which was their 52-week low. We thought that the market overreacted to this news, and it was an excellent opportunity to have fast earnings. We were right, the next day the share went up almost 11% so we decided to sell. However we kept a small position to see how the stock was going to perform. But it did not go much higher than that price and in the last few days their stock has gone down to a moderate loss for us of almost 2%. Intel Inc. We made the wrong decision by selling to early. Anyway, we decided to sell 300 shares at a 12% profit, which is not that bad. In the last weeks however it has improved somehow and now the remaining 100 shares are giving us a higher profit of almost 16%. Now we think of Intel as more of a more long-term investment.

Sun Microsystems Company Overview: Sun Microsystems provides a variety of products, services, and support solutions for building and maintaining network computing environments. This includes computer systems, higher speed microprocessors, and a line of high performance software. These products are marketed primarily to business, government, and educational customers. The company began in 1982 with only four employees and has since grown to nearly thirty thousand employees with a market capitalization on $167.8 billion. Earnings: Earnings for Sun Microsystems has shown sharp increases over the past few years. This can be attributed to both their increase in market share, as well as the growth of the industry. Of course the market has reacted to these sharp rises in earnings by valuing the company's stock price at a much higher level than it has seen in the past. Although the company currently has a very high P/E ratio of about 125, we do not feel this stock is overvalued. We anticipate these growth rates to continue to rise at even higher levels. This is largely due to the opportunities for the company that exist on a global scale. Advancements in the global market place for this industry can prove very profitable. Sun Microsystems is in a position to meet the demands that we anticipate which allows us to place such a high valuation on this particular stock. Our current year end target price for the company is $150/share which we feel will be meet if not exceed substantially. Why do we think that Sun Microsystems is a good long-term investment? What do we think differentiates Sun Microsystems from their competitors? Well, first of all, we have to stress the point that even though Sun Microsystems belongs to a highly volatile industry, we perceive them as a blue chip, this is a safe and secure investment. Why do we see them as a safe investment? During its 18 years of history they have been able to develop a curve of experience (which it is crucial for this kind of investment) which has given them technological leadership that is proven by the success of the products they have created (Java, Solaris, etc). This has been a main issue that has allowed them to exploit their market opportunities, and in fact we think that Sun Microsystems products and systems are today for the Internet and IT industries what Windows from Microsoft has been for the personal computer industry. This is the reason that has enabled them to constantly increase their market share, up to an actual 27% (estimated by analysts). Furthermore when taking a look at the geographical structure of their revenues, we can appreciate that they still have an enormous growth potential by developing additional branches in regions such as Europe and Asia. In addition, when we take a look at the companys management, we discovered some very positive aspects. For instance they have been able to reduce their debt to zero, while their competitors had to increase their debt level, furthermore they have highest growth in net income and the most constant sales growth, which we think reflects the excellence of their management. All these facts together make Sun Microsystems a good long-term investment.

Conclusion: In summary, we came to the conclusion that our portfolio was not efficient throughout this period because we did not receive the highest possible return for any degree of risk, or the lowest degree of risk for any expected return. As a result, we feel that our portfolio is not advisable. However, we have learned that in order to have an efficient portfolio, we should have determined a set of attainable portfolios with risk and return combinations by using the correlation of two securities expected returns and correlation coefficients. This is used to measure the degree of co-movement between two securities. Then from this attainable set we could have selected the efficient set of investments and plotted them in a graph with the axes as the expected Portfolio return, and the degree of risk in order to find our optimal portfolio. This is the point where it marks the highest level of satisfaction we could get receive(This is found at the tangency point between the efficient set of portfolios and one of our indifference curves on the graph). Since we did not attempt to assess what would be our optimal portfolio, the performance of our portfolio was not very successful. If we would have another opportunity to do this stock simulation again, we would definitely try to carefully identify our optimal portfolio, and surely the performance of our portfolio would have been far better.