To: Professor Jarrad Harford

From: BKTS, Jonathan Bannick, Shelby Koehler, Amy Shin, Phung Tran
Date: 14 March 2014
Subject: Stock Case
Over the past 10 weeks, we have observed the performance of our stock portfolio. Our portfolio
began as a $100,000 equally invested across Microsoft, Tesla, Tableau, and Barnes & Noble. For
comparison, we also tracked the Vanguard Index 500, the Nasdaq 100, and the Vanguard Global
Equity Fund in a separate account. We recorded the price of our stocks and the three additional
investments each week, and did not trade any other stocks along the way. In the attached
spreadsheet, you can see how much we invested in each stock and their individual weekly
returns. The spreadsheet contains a sheet with the desired table, a sheet with the weekly prices
and a sheet with the betas for each fund. We have also included the standard deviations for risk
and volatility comparisons. In this memo, you will find an analysis of our investments, including
its risks, volatility and return, as well as an evaluation of the events that may have influenced the
portfolio and market.
When examining overall risk, we can see that our portfolio was riskier than the rest of the
market. This is because the returns had a higher standard deviation. Our portfolio had an average
return of 4.27% and a standard deviation of 5.07%. To estimate the overall performance of the
market, we observed the performance of VFINX, QQQ and VHGEX. These funds all held stocks
across different parts of the market. These funds had average returns ranging from 0.41% to
0.63% and a standard deviation ranging from 2.37% to 2.52%. The calculations for these values
can be found on the attached spreadsheet.
With the stocks that we picked to comprise our portfolio, it makes sense that our risk would be
higher than the rest of the market. We wanted to take a higher risk, for the chance of getting a
higher return. On average, the Beta values of each of our stocks exceeded 1, indicating that these
investments would be more risky. Tableau and Tesla are relatively new firms, making their
performance more unpredictable and risky. Barnes & Noble is one of the last remaining book
companies with physical stores so its industry is considered risky. Microsoft has been established
for a long time and will continue to be important regardless of the markets performance, so it
was less risky than the other three stocks. We were able to reduce our unsystematic risk by
investing across several different industries but because of the reasons outlined above were still
exposed to a relatively large amount of unsystematic risk.
We also conducted a multiples valuation of our stocks by comparing the average price to cash
flow ratio for each company with their industry average ratio. The average P/CF for the
technology industry is -60.2. This is understandable since tech companies have to invest a lot in
research and development before their products can be sold to generate profits. Our intuition was
that Microsoft would have a higher P/CF since it is not a new firm in the market, therefore
having had many years to surpass its initial financial setbacks. We were correct since Microsofts
P/CF is 11.4.
Tableau is purely a software company and the average P/CF for that industry is 6.4. Since
Tableau has been doing much better than expected, their P/CF is at 147.1, which is clearly above

the industrys average. At the level of growth that Tableau has been on, their P/CF will most
likely continue to stay above that of the industrys average.
The average P/CF for the auto industry is 3.8, and this did not match our intuition for what
Teslas P/CF would be. Compared to the industrys average, Teslas P/CF is 117.6; an
astoundingly higher number than we ever expected. This could be due to the fact that Teslas
vehicles are sold at a much higher price than the average auto company and this could account to
why their P/CF is so large.
Barnes & Nobles P/CF of 16.4 is less than their industrys averages P/CF of 21.2. This was
expected because Barnes & Noble is competing with Amazon and other online book retailers.
As the multiples valuation shows, our intuition did not always match the outcomes.
Unpredictability is the largest cause of volatility in the market. Each day, unpredictable events
throughout the world can completely change the dynamic of the market. These events can occur
on both a systematic and an unsystematic level. The conflict concerning Russia and Ukraine
represents an example of market wide volatility. As the conflict with Russia heightened, the
market fell due to uncertainty about oil, because Russia is a large oil producer in the world. Since
then, the market has been fluctuating because of uncertainty about the situation.
In addition to market wide events, firm specific events affect the performance of stocks as well.
Several firm specific events occurred throughout the term of our investment that greatly
impacted the value of our portfolio. First, when Tesla announced plans to further partner with
Panasonic, the stock price jumped dramatically to hit a record high. For Tableau, the fourth
quarter revenue growth far exceeded the expected growth, which in turn raised the value of the
stock. Although Microsoft gained a new CEO, the stock remained relatively unchanged, even on
the day of the announcement. Barnes and Nobles stock continued to grow over the past 10
weeks. This is because they have gone back to the basics of focusing on physical stores and
reducing nook-related costs. They realize their strengths lie in their original business model, and
they cannot compete with online retailers.
After taking a final look at the numbers and wrapping up the 10 week portfolio, we learned that
stocks are unpredictable. Our portfolio did surprisingly better than we ever expected it to, with a
profit of nearly $39,000 in a matter of 10 weeks. News releases impacted the more volatile
stocks, such as Tesla, Tableau and Barnes & Noble, more so than Microsoft, which proved to be
more stable. Had we known exactly what occurred over the last ten weeks, we would have more
heavily invested in Tesla because its stock grew the most over the time of our investment.
However, we are pleased about the fact that we spread our investment over several different
stocks. We learned that the market is extremely unpredictable and the most favorable option is to
diversify our investments to provide the greatest potential for profit. Although our returns
exceeded the market, we recognize that market efficiency will make this unlikely to continue for
an extended period of time. We finished this project with a deepened understanding of the
importance of the stock market and a motivation to begin investing for ourselves.