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Chapter14
ManagingYourOwnPortfolio
Outline
Learning Goals
I.
PortfolioPlanninginAction
A) DaraYasakawa:WomanWonder
B) BonandGailWeiss:LotteryWinners
C) JulioandGinaVitello:Retirees
D) LucilleHatch:Widow
ConceptsinReview
II.
EvaluatingThePerformanceofIndividualInvestments
A) ObtainingNeededData
1. ReturnData
2. EconomicandMarketActivity
B) IndexesofInvestmentPerformance
C) MeasuringthePerformanceofInvestmentVehicles
1. StocksandBonds
a. Stocks
b. Bonds
2. MutualFunds
3. OptionsandFutures
D) ComparingPerformancetoInvestmentGoals
1. BalancingRiskandReturn
2. IsolatingProblemInvestments
5Gitman/JoehnkFundamentalsofInvesting,NinthEdition
ConceptsinReview
III. AssessingPortfolioPerformance
A) MeasuringPortfolioReturn
1. MeasuringtheAmountInvested
2. MeasuringIncome
3. MeasuringCapitalGains
4. MeasuringthePortfoliosHoldingPeriodReturn
Chapter14ManagingYourOwnPortfolio6
B) ComparisonofReturnwithOverallMarketMeasures
1. SharpesMeasure
2. TreynorsMeasure
3. JensensMeasure(JensensAlpha)
C) PortfolioRevision
ConceptsinReview
IV. TimingTransactions
A) FormulaPlans
1. DollarCostAveraging
2. ConstantDollarPlan
3. ConstantRatioPlan
4. VariableRatioPlan
B) UsingLimitandStopLossOrders
1. LimitOrders
2. StopLossOrders
C) WarehousingLiquidity
D) TimingInvestmentSales
1. TaxConsequences
2. AchievingInvestmentGoals
ConceptsinReview
Summary
PuttingYourInvestmentKnowHowtotheTest
DiscussionQuestions
Problems
7Gitman/JoehnkFundamentalsofInvesting,NinthEdition
CaseProblems
14.1. AssessingtheStalchecksPortfolioPerformance
14.2. EvaluatingFormulaPlans:CharlesSpurgesApproach
ExcelwithSpreadsheets
TradingOnlinewithOTIS
Key Concepts
1.
Therelationshipbetweeninvestorobjectivesandtheriskreturnprofilesreflectedinvarioustypesof
portfolios.
2.
Obtainingneededdata,indexesofinvestmentperformance,andtechniquesformeasuringthe
performanceofinvestmentvehicles.
3.
Themethodsusedtocompareinvestmentperformancetoinvestmentgoals.
4.
Thetechniquesusedtomeasuretheamountinvested,currentincome,capitalgains,andtotal
portfolioreturnrelativetotheamountofmoneyactuallyinvestedintheportfolio.
5.
StatisticalmeasuresofportfolioreturnSharpes,Treynors,andJensensmeasuresandtheiruses,
andtheimportanceofportfoliorevision.
6.
Theroleofcommontypesofformulaplansintimingpurchaseandsaledecisions.
7.
Theuseoflimitandstoplossordersininvestmenttiming,thewarehousingofliquidity,andthekey
factorsintiminginvestmentsalesinordertoachievemaximumbenefits.
Overview
Thischapterdescribeshowinvestmentportfoliosaremonitored,includingproceduresforevaluating
investmentperformanceandtimingportfoliotransactions.
1.
Thechapterbeginswithfourmodelportfoliosthatdemonstrateportfoliomanagementinaction.The
assetallocationofeachinvestor,alongwithacloselookattheirsecuritiesportfoliosriskreturn
characteristics,ispresentedinlightofhisorherinvestmentobjectives
2.
Theevaluationofanindividualinvestmentsperformanceisdiscussed.Suchperformancemaybe
measuredbycomparinganinvestmentsreturnagainstastandard.Twosuchstandardsmightinvolve
comparingactualwithanticipatedreturns,orcomparinganactualreturnagainstthereturnofanother
vehicleofasimilartype.Thetextstressestheneedforabroadrangeofdatatoassessperformance
accurately.
3.
Investmentperformancealsomaybemeasuredbycomputingandcomparingholdingperiodreturns
(HPR)beforeandaftertax.TheinstructormightworkoutHPRsfordifferentinvestmentvehicles
suchasstocks,bonds,mutualfunds,orrealestate.Itshouldbeemphasizedthatthecomparisonof
HPRsmustbeaccompaniedbytheconsiderationoftheassociatedrisk.Riskierinvestmentsshould
providehigherreturnsthanlowriskinvestmentstocompensateforthegreaterriskinvolved.
Chapter14ManagingYourOwnPortfolio8
4.
Next,theassessmentofportfolioperformanceisconsidered.Theinstructorshoulddiscussprocedures
forcomputingtheamountinvested,income,andcapitalgainsofaportfolio.Applyingriskadjusted,
marketadjustedrateofreturnmeasuresSharpes,TreynorsandJensensmeasuresallowsthe
investortocomparethebaseportfolioreturnfiguretoariskadjusted,marketadjustedrateofreturn.
Dependinguponitsperformance,aninvestormaywanttoreviseorrebalanceaportfolioinorderto
betterattainhisorherinvestmentgoals.
5.
Thefinalsectionofthechapterdiscussesthetimingofportfoliotransactions.Theinstructormay
wanttoindicatethat,eventhoughbuyinglowandsellinghighistheoreticallyagoodstrategy,itis
oftendifficultforaninvestortodeterminewhenthepriceistoohighortoolow.Apricemaydip
lowerorrisehigherinoneday,andtheinvestorhasnowayofanticipatingsuchachangeuntilit
happens.
6.
Techniquesinvestorsusetotimebuyandselldecisionsareformulaplans,includingdollarcost
averaging,constantdollarplans,andconstantorvariableratioplans,andlimitandstoplossorders.
Alsoemphasizedaretheroleofliquidityintheportfolioandtheimportanceoftaxconsiderations
whentiminginvestmentsales.
9Gitman/JoehnkFundamentalsofInvesting,NinthEdition
Itisgenerallyrecognizedthatgivenfavorablelevelsofincomeayoungerinvestorwouldseek
growthoriented,longerterm,capitalgainsinvestments.Asaninvestorages,moresecureinvestment
returnsaresought.Finally,atretirementtheinvestorwillwantsecureincomeproducinginvestments.
(a) Theretiredinvestorwouldprobablyholdsecure,incomeproducingsecuritieswithlowrisk.
(b) Thehighincome,financiallysecureinvestorwouldholdadiversified,growthorientedgroupof
securitiesprovidingcapitalgainsandfavorabletaxtreatment.
(c) Ayounginvestorwithasecurejobandnodependentswouldprobablyholdacombinationof
diversifiedincomeproducingsecuritiesandwoulddependontheinvestorstaxbracketandneed
foradditionalcurrentincome.Iftheinvestorneedslittleornoadditionalcurrentincome,the
securitieswouldbeprimarilygrowthorientedofferingexpectedcapitalgains.
2.
Itisimportantforaninvestortocontinuouslymanageandcontrolhisorherportfoliotobesurethat
investmentgoalsarebeingmet.Overtime,thesecuritiesintheportfoliomaychangetheirinvestment
characteristics,therebychangingthecharacteroftheportfolio.Iftheportfolioperformanceis
inconsistentwithitsgoals,itshouldbeadjustedandrevisedtoremainconsistentwiththeinvestors
needs.Themanagementandcontrolprocessinvolvesassessingactualperformance,comparingitto
plannedperformance,revisingandmakingneededadjustments,andtimingtheseadjustmentsto
achievemaximumbenefit.
3.
Currentmarketinformation,suchasshareprice,dividendyield,andsimilarreturndata,arecriticalto
performanceevaluation.Regularlycheckingthisdata,aswellasfollowingacompanysearnings,
dividendpayments,andgeneralnews,providesawaytomonitorstockperformanceanddecide
whethertheinvestmentshouldbeheld.Changesineconomicandmarketactivitycanaffectthelevel
ofcurrentincomeandthemarketvalueofeachinvestmentvehicledifferently.Forsomeinvestment
vehicles,suchasrealestate,localeconomicactivityismostimportant.Bondsmaybemostaffected
bynationwideeconomicconditions.Goldismostaffectedbyinternationaleconomicandpolitical
conditions.Sourcesofeconomicinformationincludelargeregionalbanks,NewYorkCitybanks,
TheFederalReserveBanks,andinvestmentservices.Allinvestmentsareaffectedbynondiversifiable
riskwhichistiedtochangesinmarketactivity.
4.
Inevaluatingtheperformanceofhisorherportfolio,aninvestorshouldcompareittosomemeasure
ofgeneralmarketreturns.Forstocks,onecouldusetheDowJonesIndustrialAverage.However,itis
actuallynotconsideredthemostappropriategaugeofstockpricemovement.Includingonlythirty
stocks,itisnotbroadbased.AbetterindexistheStandardandPoors500StockCompositeIndexor
theNewYorkStockExchangeCompositeIndex.Forbonds,theDowJonesCorporateBondAverage
ordatafromStandard&Poors,Mergent,and/ortheFederalReserveareappropriate.Realestate
returnsaremorelocalized.Therefore,inrealestatemarketsonewouldanalyzelocalreturns.This
informationmaybeavailableatlocalrealestateboardsand/oragencies.Theinvestorshould
probablydistinguishbetweenincomepropertyandundevelopedproperty.
5.
Abondmarketindicatorisinformationand/oranindexwhichreflectsthegeneralbehaviorofthe
bondmarkets.Wherestockindexesarepresentedrelativetoanoriginalbase,bondindexesarestated
relativetothebondspar,orfacevalue,orastheyieldtomaturity.TheDowJonesCorporateBond
Indexisapopularmeasureofbondpricebehavior.Itisbasedontheclosingpricesof32industrial,
32financial,and32utility/telecombonds.ThisaverageispublisheddailyinTheWallStreet
JournalandweeklyinBarronsandreflectsthemathematicalaverageoftheclosingpricesofthese
bonds.BondyielddatamayalsobeobtainedfromStandard&Poors,Mergent,Yahoo.com,andthe
FederalReserve,andisalsopublishedinTheWallStreetJournalandBarrons.
Chapter14ManagingYourOwnPortfolio10
6.
Thedividendyieldmeasuresthecurrentyearlydividendreturnearnedfromastockinvestment.Itis
calculatedbydividingthestocksyearlycashdividendbyitsprice.Theholdingperiodreturn(HPR),
ontheotherhand,measuresthetotalreturn(incomepluschangeinvalue)earnedonaninvestment
overagiveninvestmentperiod.Thechangeinvalue(capitalgainorloss)neednotberealizedtobe
consideredinHPR.ThedividendyieldandtheHPRarenotequivalent.Theyareequalonlywhenthe
priceofthestockisthesameattheendoftheperiodasitwasatthebeginningoftheperiod.
7.
Mutualfundspayinvestmentincomedividendsandcapitalgainsdividends.Incomedividendsare
derivedfromtheinterestanddividendsreceivedbythefund,whilecapitalgainsdividendsarea
resultofgainsnetoflossesrealizedbythefundonitssecuritypurchaseandsaletransactions.These
dividendsarenottheonlysourceofreturnonamutualfundinvestment;theothersourceofreturnis
achangeinthevalueofthemutualfundwhichisattributabletounrealizedgainsthatexistinthe
portfolio.
8.
Aninvestmentholdingisacandidateforsalewhen:
(1) Itfailstoperformasexpectedandnomajorchangeinperformanceisanticipated.
(2) Ithasmettheoriginalinvestmentobjective.
(3) Theinvestornowhasbetterinvestmentopportunitiesavailableforthefunds.
Ariskyinvestmentmustprovideahigherreturnthanalowriskinvestmenttoattractarational
investor,whomustbecompensatedfortakingtheadditionalrisk.
9.
Aprobleminvestmentisonethathasnotliveduptoexpectations.Eithertheinvestmenthas
experiencedaloss,orhasprovidedanactualreturnlessthantheinvestorexpected.
Whenanalyzinganinvestment,theinvestorshouldfirstask:Hastheinvestmentperformed
reasonablyinlightofinitialexpectations?Thesecondquestionis:Wouldtheinvestmentbe
includedintheportfoliotodayifitwerenotalreadythere?Iftheanswertobothquestionsisno
foraspecificinvestment,itshouldprobablybesold.Anegativeanswertooneofthequestions
indicatesthattheinvestmentisaprobleminvestmentandshouldbewatchedclosely.
10. Activeportfoliomanagementistheprocessofbuildingaportfoliousingtraditionalandmodern
portfolioapproachesandthenmanagingandcontrollingittomeetinvestmentobjectives.Active
managementshouldimprovethereturnsearnedontheportfolio.Thiscontradictstheefficientmarket
hypothesis,whichstatesthatmarketsaresoefficientthatavailableinformationaboutacompany
and/oritssecuritiesisalwaysfullyreflectedinthesecuritysprice.Ifthisweretrue,investorscould
notexpecttoconsistentlyoutperformthemarketbymanagingtheirportfolios.
11. Portfolioperformanceismeasuredbycalculatingtheholdingperiodreturn(HPR)fortheportfolio.
Thisinvolves(1)measuringtheamountinvested,(2)measuringincome,(3)measuringcapitalgain,
and(4)combiningthesecomponentstofindtheportfoliosHPR.
TheHPRformulaincludesbothrealizedreturns(incomeplusrealizedcapitalgains)andthe
unrealizedcapitalgainsoftheportfolio.Further,portfolioadditionsanddeletionsmustbetime
weightedforthenumberofmonthstheyareintheportfolio.Unrealizedcapitalgainsarethosethat
havenotyetbeenreceived.Realizedcapitalgains,ontheotherhand,arethecapitalgainsaninvestor
hasreceivedfromsaleofparticularsecurities.Anunrealizedcapitalgaincanbecomeacapitalloss
wheneconomicconditionschangedrastically.
11Gitman/JoehnkFundamentalsofInvesting,NinthEdition
12. OncetheHPRfortheportfolioiscalculated,thereturnfigureshouldbeutilizedinariskadjusted,
marketadjustedrateofreturnanalysis.Thistypeofcomparativestudycanbeveryusefulbecauseit
providestheinvestorwithinsightintohowhisorherportfolioisperformingrelativetothestock
marketasawhole.Comparingthereturntoabroadmarketindexdoesnottakeriskintoaccount.
13. (a) Sharpesmeasurecomparesaportfoliosriskpremiumtoitsstandarddeviationofreturnto
assesstheriskpremiumperunitoftotalrisk.Theformulais:
Sharpesmeasure(SM)
Totalportfolioreturn Riskfreerate rp RF
Portfoliostandarddeviation
sp
Oncecalculated,SharpesmeasurecanbecomparedtotheSharpesmeasuresofotherportfolios
orthemarket.IftheportfoliosSMishigher,itisperformingbetterthantheotherportfolioor
themarket.
(b) Treynorsmeasurealsomeasurestheriskpremiumperriskunitbutusesbetaratherthanthe
standarddeviationtodoso.Itfocusesonnondiversifiableriskonlyandiscalculatedasfollows:
Treynorsmeasure(TM)
Totalportfolioreturn Riskfreerate rp RF
Portfoliobeta
bp
UsingtheTM,aninvestorcancompareherorhisportfoliotothemarketortoanotherportfolio.
AhigherTMindicatesbetterperformance.
(c) Jensensmeasure,alsocalledalpha,usesportfoliobetaandthecapitalassetpricingmodel
(CAPM)tocalculatetheexcessreturnthedifferencebetweentheactualreturnandtherequired
return.Theexcessreturnmaybepositive,negative,orzeroandiscalculatedasfollows:
Jensensmeasure(TotalportfolioreturnRiskfreerate)[Portfoliobeta
(alpha)
(MarketreturnRiskfreerate)]
JM(rpRF)[bp(rmRF)]
PositiveJMvaluesindicatetheportfolioearnedmorethanitsriskadjusted,marketadjusted
requiredrateofreturn;aJMofzeromeanstheportfolioearneditsrequiredreturn;negative
valuesmeantheportfoliofellshortofitsrequiredreturn.
14. JensensmeasureissimilartoTreynorsmeasure;bothfocusonlyonnondiversifiableriskbyusing
beta.Jensensmeasureispreferredbecauseitautomaticallyadjustsformarketreturnthroughitsuse
oftheCAPM.Thiseliminatestheneedtocomputeameasureforthemarket;nofurthercomparison
isnecessary.Aswiththeothertwomeasures,thehighertheJMvalue,thebettertheportfoliois
performing.
15. Whenaninvestordecidestochangethecompositionofaportfoliobysellingsomesecuritiesand
replacingthemwithothers,heorsheisengaginginportfoliorevision.Periodically,theinvestormust
checktoseeiftheportfoliocontinuestomeethisorherneeds.Suchdynamicportfoliomanagement
requiresportfoliorevision.
Aseconomicconditionsandindividualprioritieschange,aninvestormustrevisetheportfolioby
reallocatingandrebalancingit.Astheriskreturncharacteristicsofthesecuritieschange,theinvestor
shouldeliminateissuesthatnolongermeethisorherobjectives.Also,portfoliorevisionmaybe
neededtomaintainanadequateamountofdiversification.Allthesesituationsrequiremanaging,
controlling,andpossiblyrevisingtheportfolio.
Chapter14ManagingYourOwnPortfolio12
16. Formulaplansaremechanicalmethodsofportfoliomanagementthattrytotakeadvantageofprice
changesinsecuritiesthatresultfromcyclicalpricemovements.Formulaplans,partofaconservative
strategy,aredesignedprimarilyforinvestorswhodonotwishtotakeexcessiveriskbutwishto
quicklyandfavorablyadjusttheirportfolioinresponsetocyclicalsecuritypricechanges.
13Gitman/JoehnkFundamentalsofInvesting,NinthEdition
Chapter14ManagingYourOwnPortfolio14
20. Thetwoconsiderationsintiminginvestmentsalesaretaxconsequencesandcompatibilitywith
investmentgoals.Whenthereisacapitalloss,theinvestorreceivesthebenefitofataxdeduction.In
particular,capitallossesprovidetaxbenefitsbyoffsettingcapitalgainsandtherebyloweringthe
investorstaxliability.Fromthepointofviewofinvestmentgoals,asecurityshouldbesoldifitno
longermeetstheneedsoftheportfoliosowner.Forexample,ifaparticularsecurityincreasesthe
riskoftheportfoliotoanextentthatitisundesirable,thatsecurityshouldbesoldinthemarketplace.
Althoughtaxesareimportant,oneshouldnotforgetthatthedualconceptsofriskandreturnremain
theoverridingconcernsintheportfoliomanagementandadministrationprocess.
15Gitman/JoehnkFundamentalsofInvesting,NinthEdition
Solutions to Problems
1.
InvestorAwouldmorelikelybetheretiredcouplebecausetheywouldwanttohavelowrisk.
InvestorBsportfolioismuchriskier,withaportfoliobetaof1.66vs.1.24forInvestorAsportfolio.
2.
PortfolioAismorelikelytobeownedbytheretiredcouple.Theywouldbelookingforlowriskand
steadyincome.PortfolioBpayslittleornodividends,buthashighcapitalgains.Thisismorelikely
tobeownedbysomeonewhodoesnotneedcurrentincomeandcanaffordtotakesignificantrisk.
3.
Capitalgain$2,500$1,762$738
Dividend CapitalGain
PurchasePrice
$200 $738
53.24%(fora15monthholdingperiod)
$1, 762
HPR
4.
A
Cost
$2,000.00
B
Proceeds
$9,500.00
BA
Profit
$7,500.00
HPR$7,480/$2,000
Annualized(12/6)
5.
HPR(beforetax)
Trading
Cost
$20.00
374%
748%
14.98%(13monthholdingperiod)
TaxCalculations
1. Interest
2. Aftertax(10.31)
3. Capitalgain
4. Aftertax(10.15)
5.
Aftertaxincome[(2)(4)]
$2,000
$1,380
1,746
$1,484
$2,864
Therefore,HPR(aftertax)
$2,864
11.46%*
$25, 000
*Fora13monthholdingperiod.
Profit
AfterCosts
$7,480.00
Chapter14ManagingYourOwnPortfolio16
6.
Sincetheinvestmentwasheldforoverayear,thelongtermcapitalgainsrateisappropriate.Under
thenewlaw,therateondividendsandcapitalgainsforanindividualinthe33percenttaxbracket
wouldbethesame(e.g.,15%).Theequationthatcouldbeusedforalltaxbracketsis:
DividendIncome(1dividendtaxrate)
CapitalGainsdistribution(1capitalgaintaxrate)
Changeinvalue(1capitalgainstaxrate)
PurchasePrice
IncorporatingthevaluesfromtheCharlotteSmidtssituationweget:
[(0.32(10.15))(0.38(10.15))(0.15(10.15))]/8.60
[0.2720.3230.128]/8.600.723/$8.608.41%
Salesproceeds Cost
Cost
($470 10Options) $4, 000 $4, 700 $4, 000
$4, 000
$4, 000
700
17.5%
$4, 000
$700 (1 0.15)
HPR(aftertax)
14.88%
$4, 000
7.
HPR(pretax)
8.
Interest0.12$100,000$12,000.Tax0.25$12,000$3,000.Aftertaxreturn$12,000
$3,000$9,000.$9,000/$100,0009%aftertaxreturn.
9.
Valueat1/1/05
Valueat12/31/05($250,00026,300)
Unrealizedcapitalgain
HPRp
InitialEquity
Investment
$264,000
276,300
$12,300
Dividendsand
Realized
Unrealized
InterestReceived CapitalGain
CapitalGain(Loss)
+(New#mos.inport) (w/drawn#mos.notinport.)
funds12
funds12
12.06%
$248,658
10. Sharpesmeasure(11.06.0)/182.78.Yourportfoliooutperformedthemarket,butnotona
risk/rewardbasis.Yourriskpremiumwaslowerrelativetoyourrisktakenthanthemarket.Thiscan
beseenbythehigherSharpesMeasureforthemarketthanforyourportfolio.
17Gitman/JoehnkFundamentalsofInvesting,NinthEdition
Totalportfolioreturn Riskfreerate rp RF
Portfoliostandarddeviation
sp
11.8 6.2
0.397
14.1
(b) HectorSmithsportfolio,withaSMof0.43,performedbetterthanNikiMalones,whoseSM
was0.397.HectorreceivedmoreriskpremiumperunitofriskthanNiki.
9.0 6.2
0.298
(c) SMmarket
9.4
(d) BasedontheSMs,Nikisportfolioperformedbetterthanthemarket(0.397versus0.298forthe
market).
12. TreynorsMeasurefortheportfolio(12.06.0)/1.34.62.
TreynorsMeasureforthemarket(10.06.0)/14.0.
Congratulations,yourportfoliooutperformedthemarketsrisk/returnratio!
13. (a) Treynorsmeasure(TM)
Totalportfolioreturn Riskfreerate rp RF
Portfoliobeta
bp
8.6 7.3
1.44
90
(b) AnnasportfoliooutperformedStacys,withaTMof1.44versusoneof1.25.
9.2 7.3
1.9
(c) TMmarket
1.0
(d) ThemarketoutperformedAnnasportfolio;itsTMwas1.9,comparedto1.44forherportfolio.
14. JensensMeasure(13.06.0)[1.5(10.06.0)]7(1.54.0)761.
Theportfolioearnedanexcessreturnovertheriskadjustedrequiredrateofreturnof1%.
15. (a) Jensensmeasure(JM) (TotalportfolioreturnRiskfreerate)
Portfoliobeta(MarketreturnRiskfreerate)]
(rpRF)[bp(rmRF)]
(12.97.8)[1.3(117.8)]
5.1(1.33.2)5.14.160.94
(b) Cheesportfolio,withaJMof.94,outperformedCarrisportfolio,withaJMof0.24.A
positiveJMindicatesthattheactualreturnexceedstherequiredreturn.Thenegativerreturnon
Carrisportfoliomeansthatitdidnotearnitsrequiredreturn.
(c) BasedonitspositiveJM,Cheesportfoliohasperformedbetterthanthemarket.
Chapter14ManagingYourOwnPortfolio18
16.
Measure
(a) SM
rp RF
sp
FioFamily
12.8 8.1 4.7
13.5
13.5
Market
11.2 8.1 3.1
9.6
9.6
0.348
0.323
TheFiofamilysportfolio,withahigherSM,outperformedthemarket.
rp RF
12.8 8.1 4.7
11.2 8.1 3.1
(b) TM
bp
1.1
1.1
1.0
1.0
4.27
3.10
TheFiofamilysportfolio,withahigherTM,outperformedthemarket.
(c) JM (rpRF)
(12.88.1)
N/A
[bp(rmRF)]
[1.1(11.28.1)]
4.73.411.29
ThepositiveJM(alpha)of1.29indicatesthattheactualreturnonthisportfolioexceededthe
requiredreturn;itoutperformedthemarket.
(d) Basedonalltheabovemeasures,theFIOfamilysportfolioperformedbetterthanthemarket.
17. (a) 24months$300$7,200totalinvestment
(b) Tofindthenumberofsharespurchasedeachmonth,divide$300bytheshareprice:
Month
January
February
March
April
May
June
July
August
September
October
November
December
AnnualTotal
NumberofShares
Year1
Year2
25.8
26.4
26.1
25.5
26.1
25.0
27.3
25.0
25.5
24.7
25.0
24.0
24.2
23.5
24.0
23.1
24.5
22.6
24.0
23.1
25.3
22.4
26.1
22.2
303.9
287.5
591.4shares
19Gitman/JoehnkFundamentalsofInvesting,NinthEdition
$7, 200
$12.17 pershare
591.4
(d) Valueatendofyear2591.4$13.5$7,983.90
(c) Averagecostpershare
18. Withoutanyaction,thespeculativeportfolioisnowworth$25,000andtheMMfundisworth
$21,000.Thedifferenceismorethanthetrigger,sotheportfoliosshouldberebalanced.Thereis
$4,000moreinthespeculative,soyoushouldmovehalfofthattotheMMfund,or$2,000.
$2,000/$2580.Sell80sharesandpurchase95sharesoftheMMfund.
19. Youshouldtakenoactionbecausethetriggerhasnotbeenhit.
$25,000/$21,0001.19.
20. Thespeculativeportionnowrepresents61%ofthetotal,whichtriggerstherebalance.Thetotal
valueisnow($301,000)($191,000)$49,000.Youwant45%ofthistobeinspeculative,or
(0.45$49,000)$22,050.$22,050/$30735shares,soyoushouldsell265(1,000735)sharesof
stock.Thentaketheproceeds($7,95026530)andpurchase418sharesoftheMMfund
($7,950/19).Theresultingportfolioisasfollows:
TimePeriod
StockPrice
Shares
MMMutual
FundNAV
Shares
StockValue
MMValue
$30.00
735
$19.00
1418
$22,050.00
$26,942.00
Chapter14ManagingYourOwnPortfolio20
Thetotalvalueisnow$48,992,andthespeculativeportfoliois45%ofthetotal.
C CG
V0
HPR
HPRformutualfund:
HPR
HPRforoptions:
HPR:
21Gitman/JoehnkFundamentalsofInvesting,NinthEdition
(b) AftertaxHPRs:
Stock(400shares):(Reducedrateondividends)
[400($0.90)(0.85)400(18.7517.25)(10.38)]/($17.25400)
($306$372)/$6,900$678/$6,9009.83%
Industrialbonds(8bonds)
AftertaxHPR8.89%(10.38)5.51%for1yearholdingperiod
Mutualfund(500shares):
(Reducedrateondividendandcapitalgaindistributions)
[500($0.60$0.50)(0.85)500(20.0219.45)(10.38)]/($19.45500)
($467.50$285)/$9,725$752.50/$9,7259.67%
Options:
AftertaxHPR11.54%(10.38)7.15%for1yearholdingperiod
($17.25400)($9708)($19.45500)$26,000
$6,900$7,760972526,000$50,385
$50,385
Totalcurrentincome ($0.90400)($92.508)($1.10500)$0
360740550
$1,650
Totalcapitalgain
($1.50400)($6.258)($0.57500)$3,000
$3,835
$1, 650 $3,835
10.89%fora1yearholdingperiod
HPR(portfolio)
$50,385
(c) Totalinvestment
(d) JM (rpRF)[bp(rmRF)]
(10.897.20)[1.2(10.107.20)]
3.69(1.202.90)3.693.480.21
UsingJensensmeasure,theactualportfolioreturnisbetterthantherequiredreturnbecauseitis
positive.Itisreasonabletousethismeasure,whichusestheportfoliosbeta,toevaluateafourvehicle
portfolio.
(e) Thisquestionshouldleadtodiscussionithasnopatanswer.Ingeneral,theportfolioisbalanced
betweencurrentincomeandgrowth.Theratioofcurrentincometocapitalgainis43($1,650/$3,835);
onemightwishtodiscusswhetherornotthisissatisfactory.Thereturnsoneachoftheinvestment
vehiclesappearacceptable;theonesthatmightrequireinvestigationarethebondsandthemutual
fund.TheyhavelowerbeforetaxreturnsthantheS&P500StockCompositeIndex,buttheymaybe
somewhatlessrisky.Probably,themostobviousrecommendationistomonitortheportfoliorather
thanchangeitatthistime.
Chapter14ManagingYourOwnPortfolio22
ConCam
221/8
227/8
227/8
22
221/4
221/8
22
221/4
Fleck
221/82
241/2
253/8
281/2
217/8
191/4
211/2
235/8
1.
NumberofSharesPurchased
ConCam
11.30
11.43
11.43
11.36
11.24
11.30
11.36
11.24
90.66
Fleck
11.30
10.20
9.85
8.77
11.43
12.99
11.63
10.58
86.75
Note:RememberConCamistheconservativestockandFleckisthespeculativestock.
2. Totalinvestment:$5008$4,000
Averagecostpershare: ConCam $2,000/90.66$22.06
Fleck
$2,000/86.75$23.05
3.
Conservativestock(ConCam)
Speculativestock(Fleck)
Totalportfolio
YearendValue
$221/490.66 $2,017.19
$235/886.75 2,049.47
$4,066.66
PercentofInitialInvestment
(1) Conservativestock(ConCam) $2,017.19/$2,000.00100.86%
(2) Speculativestock(Fleck)
$2,049.47/$2,000102.47%
(3) Totalportfolio
$4,066.66/$4,000.00101.67%
23Gitman/JoehnkFundamentalsofInvesting,NinthEdition
(b) ConstantDollarPlan:Returnspeculativevalue(Fleck)to$2,000whentriggerpointsarereached.
Priceof
Speculative
Stock
Fleck
1.22.125
2.24.500
3.25.375
3a.25.375
4.28.500
5.21.875
5a.21.875
6.19.250
7.21.500
8.23.625
Priceof
Conservative
Stock
Valueof
Speculative
Stock
Valueof
Conservative
Stock
Total
Value
ConCam
22.125
21.875
21.875
21.875
22.000
22.25
22.25
22.125
22.000
22.25
Fleck
$2,000.00
2,214.80
2,293.90*
2,000.00
2,246.09
1,723.97*
2,000.00
1,760.03
1,965.75
2,160.03
ConCam
$2,000.00
1,977.50
1,977.50
2,271.40
2,284.48
2,310.44
2,034.32
12,022.89
2,011.46
2,034.32
$4,000.00
4,192.30
4,271.40
4,271.40
4,530.57
4,034.41
4,034.32
3,782.92
3,977.21
4,194.35
Transactions
{Sold11.58
speculative
shares}
{Bought12.82
speculative
shares}
Sharesin
Speculative
Sharesin
Conservative
90.40
90.40
90.40
78.82
78.82
78.82
91.43
91.43
91.43
91.43
90.40
90.40
90.40
103.84
103.84
103.84
91.43
91.43
91.43
91.43
*Triggerpoints(whenvalueofspeculativeportionfallsbelow$1,740orgoesabove$2,260).
Conservativestock(ConCam)
Speculativestock(Fleck)
Totalportfolio
YearendValue
$221/41/491.43$2,034.32
$235/891.43$2,160.03
$4,194.35
PercentofInitialInvestment
$2,034.32$2,000.00101.72%
$2,034.32$2,000.00108.00%
$4,194.35$4,000.00104.86%
(c) ConstantRatioPlan:Rebalancetovalueofspeculativeportionequaltovalueofconservativeportion
whenratiohitstriggerpoint.
Period
1.
2.
3.
3a.
4.
5.
6.
6a.
7.
8.
8a.
Priceof
Priceof
Speculative Conservative
Stock
Stock
22.125
22.125
24.50
21.875
25.375
21.875
25.375
21.875
28.50
22
21.875
22.25
19.25
22.125
19.25
22.125
21.50
22
23.625
22.25
23.625
22.25
Valueof
Speculative
Stock
$2,000.00
2,214.80
2,293.90*
2,135.81
2,398.85
1,841.22
1,620.27*
1,890.18
2,108.94
2,317.38
2,109.10
Valueof
Conservative
Stock
$2,000.00
1,977.50
1,977.50
2,135.81
2,398.85
2,172.27
2,160.06
1,890.18
1,879.46
1,900.82
2,109.10
Total
Value
$4,000.00
4,192.30
4,271.40
4,271.62
4,546.71
4,013.49
3,780.33
3,780.36
3,988.40
4,218.20
4,218.20
Ratioof
Speculative
Stockto
Conservative
Sharesin
Sharesin
Stock
Transactions Speculative Conservative
1.00
90.40
90.40
1.12
{Sold6.23
90.40
90.40
1.16*
speculative
90.40
90.40
1.0
shares}
84.17
97.63
1.12
84.17
97.63
0.85
{Bought14.02
84.17
97.63
0.75*
speculative}
84.17
97.63
1.00
shares
98.09
85.43
1.12
{Sold8.82
98.09
85.43
1.22*
speculative
98.09
85.43
1.00
shares}
89.27
94.79
*Triggerpoints(whenratioofthevalueofspeculativeportfoliotovalueofconservativeportfoliofallsbelow0.84orexceeds1.15)
Note:Numbersmaynotaddexactlyduetorounding.
Conservativestock(ConCam)
Speculativestock(Fleck)
Totalportfolio
YearendValue
$221/494.79$2,109.10
$235/889.27$2,109.10
$4,218.20
PercentofInitialInvestment
$2,109.10$2,000.00105.46%
$2,109.10$2,000.00105.46%
$4,218.20$4,000.00105.46%
Chapter14ManagingYourOwnPortfolio24
(d) VariableRatioPlan:Rebalancespeculativeportionto46%ofthetotalportfoliovalueeachtimethe
uppertriggerpointisreached;rebalancespeculativeportionto50%eachtimethelowertriggerpoint
isreached.
Period
1.
2.
3.
4.
4a.
5.
6.
6a.
7.
8.
8a.
Priceof
Speculative
Stock
22.125
24.500
25.375
28.500
28.500
21.875
19.250
19.250
21.500
23.625
23.625
Priceof
Conservative
Stock
22.125
21.875
21.875
22.000
22.000
22.250
22.125
22.125
22.000
22.250
22.250
Valueof
Speculative
Stock
$2,000.00
2,214.80
2,293.90
2,576.40
2,099.99
1,611.75
1,418.34
1,948.84
2,216.87
2,435.97
2,022.05
Valueof
Conservative
Stock
$2,000.00
1,977.50
1,977.50
1,988.80
2,415.21
2,493.34
2,479.33
1,948.83
1,937.76
1,959.78
2,373.70
Total
Portfolio
Value
$4,000.00
4,192.30
4,271.40
4,656.20
4,564.20
4,105.09
3,897.67
3,897.67
4,164.63
4,395.75
4,395.75
Ratio
0.50
0.53
0.54
0.56*
0.46
0.39
0.36*
0.50
0.53
0.55*
0.46
Transactions
{Sold16.72
speculative
shares}
{Bought29.43
speculative}
shares
{Sold17.52
speculative
shares}
Sharesin
Speculative
90.40
90.40
90.40
90.40
73.68
73.68
73.68
103.11
103.11
103.11
85.59
Sharesin
Conservative
90.40
90.40
90.40
90.40
112.06
112.06
112.06
88.08
88.08
88.08
106.68
*Triggerpoints(whenratioofthevalueofspeculativeportfoliotothetotalportfoliovalueeitherexceeds54%,theuppertriggerpoint,orfallsbelow
38%,thelowertriggerpoint.
Conservativestock(ConCam)
Speculativestock(Fleck)
Totalportfolio
YearendValue
$221/4106.68$2,373.70
$235/885.59$2,022.05
$4,395.75
PercentofInitialInvestment
$2,373.70$2,000.00118.69%
$2,022.05$2,000.00101.10%
$4,395.75$4,000.00109.89%
(e) FormulaPlan
Yearendportfolio
valueasapercentage
of$4,000invested
Numberoftransactions
torebalanceportfolio
DollarCost
Averaging
Constant
Dollar
Constant
Ratio
Variable
Ratio
101.67%
104.86%
105.46%
109.89%
Inthisillustration,theformulaplanshaveperformedmuchthewayonewouldexpect.Themost
passiveandlowestriskplandollarcostaveraginghasthelowestyearendvalueasapercentageof
the$4,000investment.Italsorequirestheleastrebalancingtransactions.Therefore,bothits
transactionsandinformationcostsarezero.
Theotherthreeplansshowincreasingyearendvaluesasonemovesfromtheonewiththelowest
activityandrisktheconstantdollarplantohighestactivityandriskthevariableratioplan.While
thelowriskconstantdollarplanrequirestworebalancingtransactions,thehigherriskconstantratio
andvariableratioplansrequirethreerebalancingtransactions.Thevariableratioplan,whichhasa
yearendvaluenearly10percentabovetheamountinvested,isclearlysuperior.However,onemust
recognizethatthevariableratioplanisclearlythemostriskyalternative.Charlesmayhavedecisions
tomake.Clearly,giventhesharepricedataprovidedandCharlestriggerpoints,thevariableratio
planwouldhaveprovedmostbeneficialtohimduringthepastyear.Itmaybeinterestingtospeculate
abouttheresultsifpriceactionshadbeendifferent.Theinstructormaywishtopursuethislineof
inquirytogainafurtherunderstandingofformulaplans.
25Gitman/JoehnkFundamentalsofInvesting,NinthEdition
Outside Project
Chapter 14Assessing Mutual Fund Performance
Whenriskadjusted,marketadjustedrateofreturnssuchasJensensmeasurearenoteasytocalculate,
othercomparisonsneedtobemade.Forinstance,itisgenerallydifficulttofindthebetavaluesofvarious
mutualfunds;thereforeJensensmeasureisnotausefulmeasure.Instead,performancecanbeevaluated
bycomparingtheHPRsofsimilarfundsthatareassumedtohavesimilarriskcharacteristics.Thisproject
asksyoutodojustthat.
UseTheWallStreetJournal,Barrons,orsomeothersourcetoobtainthorough,readableinformationon
mutualfunds.Obtainthisinformationdatedoneyearearlierandselectfivesimilarfundsmanagedby
differentfundmanagementcompanies.Calculatetheholdingperiodreturn(HPR)foreachfundoverthe
periodfromayearagotothepresent.Barronsandothersourcesprovidethedividendandcapitalgains
distributionsfortheperiod.Ifinvestmentperformanceisconsiderablydifferentamongthefunds,youmay
wanttofurtherinvestigatetheirmanagementsthroughsuchsourcesasWeisenbergerInvestment
Companies,whichshouldbeavailableinyourpublicoruniversitylibrary.Trytoassesstheriskandreturn
behaviorsofthesefundsandusethesecomparisonstoexplainanydifferencesyoufoundintheirHPRs