Econ 422 Investment Project: Portfolio Management Assignment 1 - Prof. Eric Zivot, Study Guides, Projects, Research of Economics

Download Econ 422 Investment Project: Portfolio Management Assignment 1 - Prof. Eric Zivot and more Study Guides, Projects, Research Economics in PDF only on Docsity! Econ 422: Investment Capital & Finance Investment Project Description Summer 2008 This assignment provides an opportunity for you to go through the thought and action process involved in real world portfolio management. You will be introduced to financial assets and to financial market transactions. Overview: Out of the graciousness of my heart I have decided to provide you with $100,000 (of play money). This windfall is yours to invest as you see appropriate. In the real world private individuals and businesses alike are confronted with this same issue of how to invest core investment assets, windfalls such as inheritances, allowances, marital settlements, business revenues, etc. Assignment #1: Due Monday, August 11. You will be required to invest the $100,000 upon receipt. You will be required to use the Wednesday, August 6, 2008 closing prices as reported in the Thursday, August 7, 2008 Wall Street Journal or you can use closing prices (not adjusted closing prices) for August 6 as provided on any of numerous financial websites (e.g. finance.yahoo.com). See the class project page for a list of financial websites. Prior to selecting your investments, I would like you to think through the questions below. Write up detailed responses to these questions. These questions will help you to formulate your ‘investment strategy.’ After responding to these questions you are to select from the allowable set of investment securities subject to the restrictions listed below. Once you have determined your investments, please complete the Worksheet entitled ‘Assignment 1” in the Excel Spreadsheet ECON 422 Trading Sheet available for download on the course website. Please read the Instructions for the Worksheet carefully so as not to overwrite any necessary formulas. I encourage you to work on this assignment in groups, but each individual needs to turn in their own report and no duplicated portfolios will be accepted. You will be required to turn in your answers and spreadsheet for Assignment #1 on Monday, August 11, 2008. Questions: Investment Objectives 1. What purpose will this money be used for? 2. Is this amount sufficient at the current time for this purpose or not enough? 3. When will you need to access these funds? 4. How concerned are you, given your answers to 1 & 2 above, about losing money? About making money? 5. What investment rate of return will you target to achieve this objective over the stated time horizon? 6. What investment rate of return do you expect to achieve in the next three months (by the time Assignment #2 is due)? 7. On what did you base your answers to question 5 and 6? 8. How might your answers change if instead I provided you with only $50,000? Or instead, $1,000,000? Describe each case. Portfolio Rules: -You may purchase any combination of stocks or American Depository Receipts (ADRs—shares of foreign companies trading on US exchanges) as listed on the NYSE, AMEX, NASDAQ; corporate, government or agency bonds; mutual funds, exchange traded funds, options, money market or any other security for which you can retrieve price information. -All cash must be invested; i.e., any amount you would like to leave with maximum liquidity will need to be invested in a money market fund. There are no commissions associated with transactions in money market funds. On Thursday of each week the Wall Street Journal reports the interest paid for the previous week for money market funds. Please note the listed rates are annual rates. To determine the growth of your money market funds you will need to calculate: BT = B0(1+r1/365)d1…(1+rT/365)dT where BT is your final balance, B0 is your initial balance and the ris are the reported annual rates with the dis the number of days for which the rate applies (i.e., 7 days). Note: You will need to check your money market for interest paid each week on Thursday or perhaps the history is available on the company website. -You must purchase at least five different securities and no more than twenty securities. -You must purchase at least one bond, one stock and one mutual fund. -Assume I have provided you the cash via a wire to an account held with Fidelity Investments. Your transactions will be subject to the Silver Commission schedule at Fidelity. Should you prefer to use a discount broker you may do so, but please indicate the relevant commission schedule. -You can trade as often as you like but will be required to document all transactions and appropriate commissions, including all relevant documentation for prices. -Any dividend paying stock or bond may during the course of the project make a dividend or coupon payment. This income will need to be documented in your transaction log. You need to own the stock on the day before the exdividend date to receive the dividend. You will add the cash to your account on the dividend payable date. Similarly, any coupon payment will be added to your account on the date payable. For information about dividends paid during the quarter you can consult Barron’s and for information regarding bond coupon payment dates you can consult Moody’s bond manuals. (To avoid this accounting, you can elect non-dividend paying stocks and/orTreasury Strips, which are zero-coupon bonds.) -When you purchase shares of a mutual fund be sure to check the minimum investment required. www.morningstar.com can provide you with this information. Funds can be either load or no- load. To simplify the fee calculation, I recommend you purchase no-load funds, as there are no sales fee or commissions associated with these purchases. Be aware that mutual funds may pay dividends and/or distributions. These are reported in the Barron’s Mutual Fund table in “Weekly Statistics” or are typically available on the fund website. -The conventional denomination for bonds is usually $1,000. Bond prices however are quoted as the price per $100 so that a $1000 Face Value bond trading at $99 would cost you $990. Use the Fidelity Corporate Bond commission rates for all note or bond transactions. You can buy newly issued Treasury securities from Federal Reserve Banks and branches without paying commissions. The prices are listed in the newspaper or on the Federal Reserve websites. If you purchase a bond in the secondary market, i.e., a previously issued bond, you will need to pay an amount associated with the accrued interest since you will receive the full coupon