Running Head: CLIENT PAPER 1

Abby Willis

MGMT 311
Client Paper
Portfolio Analysis

May 11, 2017

Simmons College
Client Paper 2

Introduction:

The client is a 57-year-old man that is a father of three. He owns his own paving and

excavating business, put three kids through college, and is looking to retire in the next few years.

He currently has no mortgage or debt to pay, but he does own a house and has 5 cars under his

name. He has over $1 million in assets with no liabilities. He likes to budget his money and is

fiscally conservative. New money is going into saving for retirement. He is looking for short

term growth and a long term balance portfolio.

He is currently just starting to invest in stock. He is trying to become more diverse in

what he is investing – he has started to broaden out into technology, health, materials, energy,

and financials. Right now, he does not need this stock money. He is still working with about

$150 thousand coming in per year plus a good diversified portfolio. His portfolio currently

includes 42% in domestic equity, 35% fixed income, 15% international, 6% balanced, and 2%

cash.

Currently he believes he is a moderate risk client. Based on an investment test from Wells

Fargo (Risk Tolerance Quiz), the client is moderate-high risk, but based on another investment

risk test (What’s Your Risk Tolerance?), he was considered cautious. The client is willing to take

some risk, but is aware that he does not have a long period of time to make up the money he

loses. His main concern is to keep the money he has, and to make some more.

Currently his rate of return is 5% to 10% annually. He has an expected rate of return of

about 8% for the time of this class. It is possible that for this period, 8% return will not happen

due to the lack of risk. He prefers long positions rather than short, so getting a quick return is not

always going to happen. So far, there is over 2% return, but it has been made known that due to

the market and current events happening, there is no true way to predict what could happen.
Client Paper 3

The communication plan includes talking on the phone, emailing, and texting 3-5 times

per week. It is known that that strategies may change and big requests or suggestions may be

stated, and that should be done through email for a hard record. Phone and texting conversations

can include an updated status of the portfolio. Communication is also going both ways. The

advisor will let the client know which stocks are doing well and which ones should be on our

watch list to be sold. The advisor is also constantly informing the client of news and which

stocks are a good idea to invest in. Thus far, this has worked well.

Currently the asset portfolio is at 100% stock. As we move forward, we will look into

securities and futures. Bonds are currently weak, but that does not mean we will not invest in

them. The client has been advised to diversify and not only be in stocks. He has agreed. The

largest majority will be in stocks, but not 100%.

Our strategy for which stocks to purchase include picking companies that are doing well.

Of course, most people try to do this. The client is basing picks on strong ratings and a good PE

ratio. The client favors stocks that pay dividends, but it is not an absolute.

In regards to educating my client, I will do my best to express what I have learned each

week to him. I also include up to date news in the education plan. Using the Wall Street Journal

as my main source of news is going to stay the same. I have also been using the textbook, and

investment websites. When my client has a question, I do my best to come up with a detailed

answer. We have gone over how to calculate return, and how each individual return is added into

our total return, and how that compares to the market as a whole.

In terms of past analysis, small stocks have continued to rise since 2012. Large stocks

have gone up and down around $4,000 in 2013 until 2015, and then rose to $5,000 in 2016.

Treasury has increased a very large amount since 2013. It was at $25 and has risen to about $98,
Client Paper 4

a 288% increase. Government issued stocks have been relatively the same over the years.

Jumping to over $100 in 2014, it has gone back down the past two years. Lastly, inflation has

stayed nearly the same all within $13 since 2013.

The client and advisor are forecasting a growing market under the first few months of

President Trump. Knowing that he is going to be changing many different policies and

implementing new ones means that the market is going to react to it, and it will grow. Small

stocks show that they have the largest return, but also the most risk. For 2017, the client and

advisor are forecasting that small stock will go up to about $37,000. It has gone up a bit from

2015-2016, and it will continue to go up with the current market. Large stocks will also go up,

but not as much. It will be around $6,000. From 2013-2015, the large stock stayed around $4,000

and didn’t go to $5,000 until last year. Having a big jump is unlikely for these stocks. The

treasury bill has gone up the most, from $25.08 in 2013 to $97.62 in 2016. This is either going to

stay the same or go up a little. It has gone up too much for it to keep rising, but that it should

plateau for a while like it has in the past. For government issued bonds, the amount is going to

stay around $110. The number has been relatively stable for the past few years. Lastly, inflation

is going to also stay around $13 in 2017. This number has not increase much since 2010. It is not

going to change drastically this year. As always, the stock market is unpredictable and it changes

extremely quickly. The client is going to invest most into large stocks since they are not as risky,

but due to the client’s desire for a return, small stocks will also be invested in with these

forecasts.

Value of Portfolio:

The ending value of this portfolio is $5.2 million. The holding period return is 4.51%,

and the annualized calculated return is 19.39%. My client stated that he wished to have an 8%
Client Paper 5

return annually, and we exceeded this goal. The client had said they he is used to a 5% - 10%

annual return, so seeing a number nearly hit that in only three months was pleasing to the client.

Benchmarks:

The client’s portfolio was very similar to the market. As seen in Appendix A, B, and C,

the client’s portfolio followed what the market did for the majority of time. Compared to the

S&P 500, there were moments in time where the client’s portfolio did better than the market,

seen in appendix A. Specifically, between February 3rd and February 10th, the client’s portfolio

grew to over 1.6%, while the S&P500 declined to 0.96%. This was due to investing in Amazon

and Nordstrom, earning a positive return on both investments immediately. However, in early

March, the client’s portfolio was earning about 2.5% and the market was around 5%. Over three

months, the client portfolio did worse than the market, but followed similar ups and downs. In

appendix B, it shows the client’s portfolio vs. the Dow Jones. This is very similar to the look of

appendix A. The client’s portfolio did well in the beginning of February going to 1.69% while

the market was at 1.18%, but then fell below the market. From then on, the portfolio held

constant against the market at about 1% less. In the beginning of April, the portfolio did grow

while the market declined, but still did not beat the market. Finally, comparing to the NASDAQ,

seen in appendix C, the portfolio was constantly lower between 1-3%. It never reached the

market or above. Stock and equity was the biggest portion of our investment, and therefore it

shows that our long positions were affected by what was happening in the market.

Strategy:

The initial strategy discussed with the client was to buy companies that were doing well,

with high ratings. The client defined companies that are doing well as companies that have had

an overall positive return over the past month or so, with positive news reports as well. For
Client Paper 6

example, a company like Amazon was rising in price consistently from December, allowing it to

be considered a company that is doing well. This is extremely broad and led me to believe that

the portfolio could be very diversified, or not at all. The client also stated that he wished to invest

in stocks that paid dividends, but it was not an absolute must. All in all, the client was open to

trying new things, and investing in more than just stocks. The client was hesitant when we

started, however early on he quickly became more comfortable with the market.

As for the strategy that was actually explored, the client started off by investing in big

name companies, such as General Electric, General Dynamic, and Pfizer. In order to be safe, the

client also invested in Silver and Gold. Silver and Gold are not that volatile. When the dollar

falls, or investments fall, gold and silver tend to go up. This was done in case of a market crash,

or a few really bad days in the market. As the months went on, the client began to look at ratings

as the number one way to find investments. As the advisor, my strategy relied on the news. If a

news story came out stating that a company’s report was better than expected, we invested in it,

for example this happened to Tesla. If a company had a bad report, like Verizon, then we shorted

it. The strategy was simple, and made the client and advisor watch and pay attention to the news

and the market frequently throughout the day, but it worked well. Overall, the strategy stayed

rather similar to what was expected, because the expected was broad.

Risk-adjusted Results:

As far as results go, the portfolio earned .84 using Jenses Alpha. This measures how

much the portfolio beat the market. Although .84 is very little, it is still a positive number. Our

portfolio did beat the market, but matched it rather closely. We earned an excess return. This can

be expected. The portfolio was diverse, but could have been much more diverse in terms of

industries (Appendix E).

Client Paper 7

Using the Sharpe Ratio the portfolio calculated a 2.05. This measures performance

adjusted for total risk. Given the risk, we earned 2.05 reward. The higher the number the better

the portfolio did. A 2.05 is a decent number to receive for reward based on the risk. My client

was moderate-low risk so earning this number left us happy.

Behavioral Tendencies:

A few of the client’s behavioral tendencies included loss aversion, overconfidence, and

recency bias. The client often held onto the stocks that he thought would do well in the long run,

even if they were continuing to go down. As the advisor, there were some that I sold or covered

anyways, but did not do this to all of them. This caused for a loss of money, more of what was

necessary if we had sold or covered it earlier. One example of this in the portfolio is Prudential

Financial. This was invested in at $108.35 on February 9th, then more was bought on February

13th at $109.68, and again a few days later at $110.64. After this last investment, Prudential

began to fall (Appendix F). The client was confident that PRU would begin to rise again, and did

not agree to sell it until it was at $102.92, a clear loss. Overconfidence played a role as well.

Unfortunately, this happens to the best of us, but when dealing with money it can be extremely

dangerous. The client became confident in his choices and not as confident in the advisors.

However, looking back now, the advisor’s picks did just as well or better as the client’s. The

client had a lack of trust in the beginning. He believed that the companies he knew of would do

well, and this wasn’t always the case. One example of this is investing in Nordstrom. Nordstrom

was doing okay compared to the rest of the retail industry, consistently going up in the beginning

of February (Appendix G), but the client did not want to buy. The advisor insisted on it anyways,

and we earned a positive return, and if we had held it longer, would have made more. Lastly,

recency bias was seen. This isn’t necessarily a bad thing with investments, but it is important to
Client Paper 8

take into account what has happened before, and not just look at what is happening recently in

the news or with a company. For example, Tesla may have had a great report, but it is seen in

Tesla’s history that it has never been stable, so only relying on the recent news isn’t a helpful

strategy. Overall, the client was rather easy to work with and willing to learn. The client became

interested in other ways to invest, like options and futures, however still feels comfortable with

stocks. The behavioral tendencies are being worked on still and hopefully this will help with

investing in the future.

Best & Worst Investments:

The portfolio’s best investment was Ocean Power Technologies, receiving a 46.64%

return on a short. This was added to the portfolio when it had reports of doing well around April

24th because it announced the deployment of its PB3 PowerBuoy off the coast of Japan. We

shorted OPTT based off of this information and knowing that stocks typically go back down

from $2.46. Based on the graph of the stock, it was steady around $1.50, and we shorted on the

feeling it would go back down. In addition, long-term investments that received a high return

include Amazon and Lam Research Corporation, earning 12.18% and 10.15% respectively.

These are two rather large companies that are well known. Amazon was not a surprise to see rise

over the entire three months, however it is not a dividend paying company, so the client was not

entirely sure if he wanted to invest in it or not, but knowing how well Amazon (AMZN) was

doing, he agreed. This became an investment that we referred back to and invested more in as

time went on. Lam Research Corporation (LRCX) was invested in a bit later on March 21st. If we

had invested in LRCX originally, we would have had a higher return. The client was pleased

with these two returns. We both learned that big companies that have been doing well over a
Client Paper 9

period of time are not a bad idea to invest in. Especially a company like Amazon, who is ahead

of the industry and holds a large portion of customers.

The worst investments included North Atlantic Drilling Limited, yielding a -35.00%

return, Snap Inc., earning a -18.23% and Zoned Properties, yielding a -15.07% return. Each of

these required the client to take a risk and see what happens. North Atlantic Drilling yielded a

negative return very quickly and caused us to sell it. On a search for more stocks to invest in, this

came up and we invested in it without research. It had been doing okay, but quickly dropped.

Unfortunately, this happens sometimes and there is no way of controlling it. Snap Inc. was a

large risk. Watching it before it became public was exciting, and as some people had hoped it

would be like Facebook, we did too. We did not wait to buy it, but the price had risen quite a lot

before the order went through. We waited for it to go back to that price of nearly $24, but it

never happened. This is due to one of the behavioral tendencies talked about previously. Snap

Inc. caused the client and I both to learn a lesson of looking at the numbers and learning. Finally,

Zoned Properties was an unknown company that was invested in purely for the sake of

diversifying the company. The client had researched a few companies in a specific sector and

decided to take a risk on Zoned Properties. Unfortunately, it was not a successful risk to have

taken, and was held for quite a while before deciding on selling it and moving on. As touched

upon before, behavioral tendencies can truly hurt a portfolio if not made aware of them or

refusing to believe them.

Trades Summary:

The full $5 million was not used. After three months, $717,000 was still left to invest.

The client and advisor could not find companies to that we wanted to invest in, and instead saved

that money as cash. Margin of $115,200 was used. About 150 trades were made during the
Client Paper 10

semester over three months, at least 5-10 happening each week. All asset types were touched

upon. However, stocks were used the most. There were about 3 futures, 2 bonds, 3 options, and 2

mutual funds other than the stocks. The asset types can be seen in Appendix D. The client felt

most comfortable with stocks, so the other asset types were done by the advisor.

Future Portfolio:

The portfolio of this client is still open with 17 equity positions, two bonds, and two

futures. There is still $700k to be invested. This portfolio is diverse and doing well. The

beginning portfolio was not extremely diverse, investing a lot of money into big companies like

Amazon, and it is not investing in companies that are doing research, technology, retail, etc.

There are now more than just stocks as well, something that the client is just being introduced to.

Reflection & Learning:

Over this semester I learned more than I thought I could in only a 15-week class. Some of

the best learning experiences were done by using Stock-Trak and making mistakes. I assume this

is the point of using an educational website. Learning from my peer’s mistakes helped as well,

taking about what to do next time to avoid those mistakes. The following discusses some of the

main learning from this semester, which discusses the value of money and stocks, and how to find

the value.

Price is the actual amount of money it costs to buy a share, but value is the perceived

benefits with price in mind. When we know a value, we can look at a price and see if it is worth

buying or not. Value is what we believe something is actually worth. With stocks, there is a market

value and a stock price. Market value is the value of a company according to the stock market, and

it is found by multiplying shares outstanding by current market price. An investor will use both.
Client Paper 11

An investor will look at the market value of a company, and if the stock price is lower than the

value, it is a good buy. If the value is lower than the price, then the investor likely would not put

money into the company.

The dividend discount model is a way to value a company’s stock price based on the idea

that its stock is worth the sum of its future dividend payments, discounted back to their present

value. It is the net present value of future dividends.

The formula is Po = D1 / k –g

Its assumptions are that the company pays dividends, it has stable earnings, and that g is

less than k (growth rate is less than interest rate). This is a way to value stock. If the answer from

the DDM is much higher than the price that the stock is listed for, it’s probably not a good idea to

invest, and vice versa. Stock prices increase for a variety of reasons. Supply and demand can cause

stock to increase and decrease. If there is high demand, the prices of stock end up going up, but if

there isn’t a high demand, then stock prices will go down. Other things like concerns about

inflation or deflation, government policy, technology changes, new products, performance data

and fiscal statement releases all affect stock prices. In addition, when news comes out, people try

to act right away which means the market reacts right away, and it immediately causes the stock

to either go up or drop.

Wall Street Journal articles that are helpful include market articles, which cover a general

idea of the market, business articles that focus on a specific business and its performance, and also

government articles. If the government is implementing something new, the market is going to

react.

Price ratios include the price to earnings, which is stock price / EPS, price to sales which

divides the company’s market capitalization by the revenue, price to book ratio, which compares
Client Paper 12

the market value and book value, price-cash flows, and enterprise value to EBITDA. Each of these

uses numbers from previous years, along with forecasts, to value the stock of a company.

There are many different ways to value a stock. Common ways of doing this include the dividend

discount model, the residual income model, and price ratio analysis. Something to note about the

dividend discount model is that it doesn’t always work. The model values the common stock as

the sum of the expected future dividend payments, after being adjusted for risk and time value of

money. It is usually assumed that dividends will grow at a constant growth. In order to use the

DDM, the company must pay dividends, it must have stable earnings, and the growth rate must be

smaller than the interest rate. If there is not constant growth rate, the two-stage dividend growth

model can be used, which uses two different growth rates. The formula for the DDM is D1 / k-g,

where D1 is the future dividend, k is the interest rate, and g is the growth rate. D1 can be found by

taking the last dividend and multiplying by (1+g). The growth rate can be found by finding the

average growth rate within the past few years, or taking the most recent dividend, dividing by a

dividend in a previous year, raising it to N which is one over the year’s period, and subtract one.

K can be found by using CAPM.

The residual income model is typically used to value a stock that doesn’t pay dividends.

The formula is Po = (EPS1 – Bo x g) / (k –g), where EPS1 is the EPS (1+G), Bo is the book value

per share, and k and g remain the same, interest rate and growth rate respectively. The RIM can

also be used for companies that do pay dividends, but the DDM is typically easier to use.

Lastly, price ratio analysis is used very often by analysts to value a stock. There are many ways to

do this, including price-earnings, price-sales, price-cash flows, price-book, and enterprise value

ratios. There is not one that is better than the other.

Client Paper 13

It is important to remember that no matter what you use to value a stock, the answer is

never going to be perfect. However, it is very useful to see if a stock is over or undervalued, and

whether it is a good investment or not.

In addition, one must look at financial statements from a company, either through the 10k

or 10q. The three financial statements include the balance sheet, the income statement, and the

cash flow statement. With these financials, you can do any of the ratios and see the performance

of a company. It is important to look at these before investing a lot of money to see how a company

has done overall. By only looking at one of the statements, it can be misleading to see how much

the net income or other expenses a company has. With this information, one can make a forecast

about the years to come and how the company will do. This helps with investments to see if it is a

good idea to have a long position or not.

My client learned quite a bit during this semester as well. My client consistently states how

fun this has been and how grateful he is that I am learning this at a young age. Since he is investing

with real money, Stock-Trak gave him the ability to experiment with fake money, and see how it

turns out. As someone who had not learned about options before, he was always asking questions

and trying to learn more about them. His biggest take away was that being more diverse with your

money allows for a greater return. Being aware of this has made him become more diverse in his

real investments and expand from his comfort zone. Since doing this, he has seen an increase in

return. He thinks that this is a great learning experience for both the student and their client. He

has always believed that real life situations allow people to learn more than just talking about

scenarios. We were able to make mistakes and not have any negative repercussions, making us

comfortable in taking risks.

Client Paper 14

For suggestions, we think that lowering the amount of money is a good idea. Having $5

million at the undergraduate level is so unrealistic that it causes the client and advisor to make

trades that they never would in real life. We found ourselves trying to use all of the money and the

only way we could do this was to invest in the things we had never heard of. We think having

around $1 million would be more beneficial. We also suggest that the students are required to keep

the log – it would have been helpful if we had actually used it like suggested.

In the future, I know I will use what I have learned in this class. I will likely invest my own

money, and I now know how to do this smartly. For example, investing in options is a way to make

quick money as long as I am willing to take that risk and have the time to watch that investment

closely. I will always know to diversify my portfolio. Although I continuously say this, making

diverse investments is something that I have learned a lot about this semester. If I invest in only

one or two industries, my portfolio is not going to do well. The industry as a whole usually follows

itself, so all of the stocks could drop at once. As for my professional life, I don’t know what I will

be doing. However, I gained experience of working with someone professionally and having to

advise them. I have an internship doing wealth management this summer and I was able to talk

during my interview about this class and Stock-trak. The partner was really impressed with what

we were doing and was happy to see that I was learning things like diversifying the portfolio, and

seeing what types of investments will make a positive return in the long-run. This class has taught

me more than just valuing a stock, but has taught me about the market, how news affects the

market, and how to work with people and help others that you may not always agree with. I had a

great experience with this and I am glad that Stock-Trak was such a large part of our learning.
Client Paper 15

Sources:

https://www.learnvest.com/knowledge-center/quiz-whats-your-risk-tolerance/#pid-8

https://www.wellsfargo.com/investing/retirement/tools/risk-tolerance-quiz/
Client Paper 16

Appendix A:
Client Paper 17

Appendix B:
Client Paper 18

Appendix C:
Client Paper 19

Appendix D:
Client Paper 20

Appendix E: Industry Diversity

Client Paper 21

Appendix F:
Prudential February
Client Paper 22

Appendix G: Nordstrom February