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FIN 567 Class Project New Work
Assume that you have $500,000 to invest in equities and want to establish a new portfolio that includes ten (10) stocks to be selected from the Dow Jones Industrial Average of 30 companies. It is also desired to start with nearly equal dollar values of each issue. Use current market prices to compute the number of shares required.
You are bullish on the markets in the long-term; however, you have read analyst predictions that over the next 18 months the market will likely stay flat with some downside potential. Despite these predictions, you want to make some money in the short-term, and at the same time avoid any downside spikes in the markets. A hedging strategy using options and/or futures seems appropriate. Please develop a plan to accomplish your goal and give a detailed explanation, with numerical computations, of the upside opportunities and the downside risks for each chosen position.
In addition to your investment in equities, you also have $1 million dollars to invest conservatively in U.S. Treasury issues and money market securities. Select four T-bonds and/or T-notes ranging in maturity from two years to five years and purchase equal dollar amounts with a total of approximately $500,000. Invest the remaining $500,000 in the money market. You need not select individual money market issues; just assume that the money market investments are secure and return the risk free rate. Please discuss the how the inclusion of the fixed income securities affects the risk in your total portfolio.
To begin the project you need to select 10 stocks and fixed income issues. When buying large quantities of stocks, it is most usual and convenient to issue orders in round lots (rounded to 100 shares). You should do this for your analysis. When you sum the value of the rounded lots, the result will almost certainly not be exactly $500,000. Ignore that difference and use the sum of the rounded lots as your equity investment. The same holds true for the fixed income selections. A spreadsheet is provided in Doc Sharing to help you do the required computations.
This project is about quality and substance, not about volume. Your narratives should be concise, comprehensive, and easy to read. APA format is required. Your pricing numbers for derivatives must be expressed in a spreadsheet format. Your presentation should be in the following order:
1. Executive Summary
2. Explanation of Hedging Strategy
4. Explanation of the strategy’s risks and rewards
This narrative should be a brief explanation of the objective, strategy, and conclusion. There need only be enough information to provide a reader an overview of the issue, your approach, and your perceptions on how you will benefit.
For every derivative security you select as a part of your strategy, there should be a spreadsheet entry identifying the derivative, and all purchasing or selling elements, e.g. strike price, expiration, and costs. You should also show possible outcomes. Example, if you recommend selling a call option, then show the net results if the underlying stock moves down, stays flat, and rises above the strike price. The net results should be expressed in net dollars (actual return or loss), actual percentage gain or loss, and annualized percentage gain or loss.
Risks and Rewards
This is a narrative based on the probabilities shown in your spreadsheet. You should provide a brief explanation of the outcomes should the market decline, stay flat, or rise.
This is your opportunity to express your professional opinion that your strategy will enhance your portfolio.
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