Term Project AD 717
Final Project
For your term project, you are going to build a portfolio of 12 stocks and write a prospectus of your
mini-fund.
Consider the following three investors:
• Bryant is a 25-year old young professional, employed in a major city in the northeast. Since
joining the workforce three years ago, he contributes as much money as possible to his
retirement accounts which is invested in a diverse set of index funds. An avid fan of Benjamin
Graham’s “The Intelligent Investor”, he has decided to consider a few individual stocks of
companies with good and stable long-term prospects as well as a great management.
• Nicole is 52 years old, and a few months ago, she retired from her well-paying job after
aggressively saving and investing her money prudently for much of her life. While she could go
back to work if necessary, she prefers her financial independence. In order to maintain a steady
cash-flow, her portfolio is heavily geared towards high yielding stocks, allowing her and her
family to live of dividend payments for the most part. Aware of the downturn of General Electric
and their dividend cut, she focuses on companies from which she expects a solid and steady
dividend growth.
• Peter is in his mid 30s. He did not start a well-paying job until two years ago, and therefore, he is
behind on his retirement savings. To make up for lost time, he is contributing the maximum
allowed to his individual retirement account (IRA), which is invested in market ETFs.
Additionally, he sets aside $10,000 every year for the next ten years for risky high-growth
investments.
Select one of these investors as your client for whom you create the portfolio of 12 stocks. Your stocks
must be listed on a US stock exchange and their IPO must be more than five years ago. Then, perform
the following exercises:
1. Write one paragraph per stock in your portfolio explaining clearly why this stock is a good choice for
your portfolio given the investor profile. Support your answers with both description of the firm and
their business model and appropriate financial ratios.
2. Download five years of monthly stock prices from September 2016 to September 2021 and compute
the monthly returns from October 2016 to September 2021. (You need to download 61 prices to
compute 60 returns).
3. Download the file https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/F F_Research_Data_Factors_CSV.zip. In this file, you find excess market return, SMB, HML and the
risk-free rate. Use the risk-free rate to compute the excess returns for your stocks.
4. Run a regression of the stocks’ returns against the excess market return to find the CAPM beta.
5. Make a forecast for the alpha of each stock,
that is, the return that you expect the stock
to perform minus the return predicted by
the CAPM. Justify your alpha based on the
firm’s business models and financial ratios.
6. Build an active portfolio with the 12 stocks
according to Chapter 27.1 in our textbook.
7. Run a regression of the stocks’ returns
against the excess market return, SMB and
HML to find the market beta, SMB beta and
HML beta. Categorize each company into
a. defensive, neutral or aggressive for
the market beta;
b. small, neutral or big for the SMB beta;
c. value, neutral or growth for the HML
beta.
8. Run a regression on the portfolio with the
weights you find in part 6 against the excess
market return, SMB and HML to find the
market beta, SMB beta and HML beta of the
entire portfolio.
9. Based on your findings and the investment
strategy, identify a benchmark portfolio against which you will compare your portfolio.
10. Recreate the sections in purple for your portfolio. A better copy of the mutual fund sheet can be
found in Chapter 4.8 of our textbook.
As the selected investor profile, I have chosen Nicole, who is focused on high-yielding stocks with solid and steady dividend growth. Therefore, the portfolio of 12 stocks that I have chosen for her is as follows:
AT&T (T): AT&T is a telecommunication company that has been in business for over a century, providing services to both individuals and businesses. The company’s steady cash flow allows it to provide a high dividend yield of around 6%, making it a great choice for income-seeking investors like Nicole. The company’s price-to-earnings ratio (P/E ratio) is around 8.3, which is relatively low compared to other companies in the sector.
Coca-Cola (KO): Coca-Cola is a leading manufacturer and distributor of non-alcoholic beverages worldwide. The company has been in business for over a century and has a strong brand image. Coca-Cola’s P/E ratio is around 29, which is higher than the industry average, but the company’s strong financials and steady dividend growth make it an attractive choice for dividend investors like Nicole.
Procter & Gamble (PG): Procter & Gamble is a consumer goods company that produces a wide range of household and personal care products. The company has a long history of stable earnings growth, and its dividend yield of around 2.5% is also attractive. The company’s P/E ratio is around 25, which is higher than the industry average, but its strong brand image and financials make it a good choice for long-term investors.
Verizon Communications (VZ): Verizon is a leading provider of telecommunication services, with a strong presence in the US market. The company’s stable cash flow and high dividend yield of around 4.5% make it an attractive choice for dividend investors like Nicole. Verizon’s P/E ratio is around 10, which is relatively low compared to other companies in the sector.
Johnson & Johnson (JNJ): Johnson & Johnson is a healthcare company that produces a wide range of medical devices, pharmaceuticals, and consumer health products. The company has a long history of stable earnings growth and a high dividend yield of around 2.5%. The company’s P/E ratio is around 23, which is higher than the industry average, but its strong brand image and financials make it a good choice for long-term investors.
PepsiCo (PEP): PepsiCo is a leading manufacturer and distributor of food and beverage products worldwide. The company has a long history of stable earnings growth, and its dividend yield of around 3% is also attractive. The company’s P/E ratio is around 26, which is higher than the industry average, but its strong brand image and financials make it a good choice for long-term investors.
McDonald’s (MCD): McDonald’s is a leading fast-food restaurant chain that operates worldwide. The company has a strong brand image and a long history of stable earnings growth. McDonald’s also provides a dividend yield of around 2.3%, making it an attractive choice for dividend investors. The company’s P/E ratio is around 36, which is higher than the industry average, but its strong financials and brand image make it a good choice for long-term investors.
Coca-Cola European Partners (CCEP): Coca-Cola European Partners is a leading bottler and distributor of Coca-Cola products in Europe. The company has a long history of stable earnings growth and a high dividend yield of around 3.5%. The company’s P/E ratio is around 17, which is relatively low compared to other companies in the sector.
Chevron Corporation (CVX): Chevron is an integrated energy company that explores, produces, and refines oil and gas
