Portfolio Case essay

Daniel’s Portfolio Risk and Return Case

Due date: June 20th

Daniel is a part-time Starbucks barista and finance student. As a Starbucks employee, part of his

wages was paid in form of RSUs (restricted stock unit)1. Theses RSUs, also known as Bean

Stock will be turned into shares after the employee has worked for 2 continuous years in

Starbucks. The reason behind the Bean Stock program is to “turn employees into partners” so

that employees can “share in their financial success2.” After the vesting period of 2 years, the

employee can decide whether to keep the stock or sell the stocks. Daniel has kept his stock for

the last 5 years.

As a finance student, he knows the importance of time value of money and investing early for

retirement. In class he learned that the longer the money has time to accrue the more that

investment will grow. He also knows that there are different investment vehicles that give

different return on investment. One of the first things he learned was the risk and return concept.

To make high returns he has to be willing to take some risk. He could put his money into a

savings account or a money market, a very safe and liquid account, or he could take extra risk

and put his investment in the stock market. Since he already has Starbucks’ stock, he decides that

this is the logical move for him. However, he also learned that a rational risk investor will

always invest in a diversify portfolio. He is thinking about investing in other companies diversify

his portfolio. By diversifying his portfolio, he can reduce risk that is inherent of investing in the

stock market.

As an investment novice who also has a financial constraint, he decides to look at a number of

options. He decides to invest in GM, XPO, VZ, and SPY.

General Motors (GM) is an American auto manufacture company who employs over 180,000

people in 5 continents3. GM manufactures 8 different car brands, among them include Chevrolet,

Buick, GMC and Cadillac. GM brands themselves as a technological innovator. GM is one of the

first to “mass-produce an affordable electric car” and development of a self-drive car. They are

also making headways to producing a cleaner car. Recently, however, GM has been in the news

for discontinuing several models (mainly sedans) and laying off over 14,000 employees4. This

could however be more of a strategic move than a signal of weak performance.

XPO Logistics Inc (XPO) is a logistic company that assists their customers with their supply

chain and transportation needs5. They help many companies with their online market space and

makes sure that goods reach the attended customers. They have 1,529 locations in 32 countries

and serve 50,000 customers. The continual growth of ecommerce means that XPO’s service will

remain relevant and necessary to those companies looking to enter the ecommerce space.

Verizon Communication (VZ) is one of the largest telecom service providers. In 2017, Fortune

ranked them number 166. While Verizon is most known for their wireless products it also owns

well known subsidies such as Yahoo and AOL, and has recently created a new subsidiary called

Oath a media platform provider7. Verizon also recently launched Verizon 5G Network, a faster

internet, in selected cities8. They plan to extend coverage to the rest of the nation in 2019. They

will be the first company to provide 5G services to the public.

Starbucks (SBUX) opened in 1971 in Seattle as a local coffee shop9. Since than it has grown to

over 24,000 stores in 75 different countries. Starbucks have over 30 coffee blends using high-

quality beans from Latin America, Africa, and Asia. Besides coffee, Starbucks also sells tea,

fresh food, and other merchandise. Starbucks is known as one of the “World’s Most Valuable

Brand” according to Forbes as well as “Best Employer.”

Daniel believes in investing in what he knows. He owns a Chevy truck and is a Verizon

customer. Furthermore, he recently became aware of XPO logistics and their importance in the

online market space. Though he has financial constraints and want to receive the most out of his

diversification benefit, he also decides to invest in SPY. SPY is the ticker symbol for SPDR S&P

500 ETF Trust. The SPY is an ETF that follows the S&P 500 Index. The S&P 500 is a market-

value index that holds 500 of the largest companies that is listed in the NYSE or Nasdaq

exchange. ETFs are similar to mutual funds that can be traded in exchanges. Daniel believes

since he has financial constraint, holding SPY is a good way to diversify.

He comes to you, an MBA student for help on quantifying his risk and return. Daniel wants to

know the risk profiles of the different companies. Furthermore, he wants to know if the newly

constructed portfolio provides the necessary expected return to compensate for his risk.

Assignment: Provide a quick rundown of Daniel’s situation. Discuss strategies and goals of how

he can “add value”. Think about issues such as efficiency, risk-return, and how to add value.

Include a recommendation of a portfolio make-up (weights, or even suggestions of other stocks).

1. Estimate and compare the risk and return of each stock and the SPY. Give the monthly

and annual return for each stock (use videos to annualize monthly return). Which stock

appears to be riskiest? How might the expected return of each stock relate to its riskiness?

2. If the portfolio was equally weighted (20% in all stocks and ETF) what is the resulting

portfolio position (risk and return)? How does the variability of each stock affect the

portfolio? How does this relate to your answer in question 1 above? How would the

portfolio risk and return change if 50% of it is in SBUX, 20% in SPY, and 10% in each

of the remainder securities. What is the correlation matrix between stocks? How does

correlation play a part of portfolio construction?

3. Compute the “beta” for each stock. What does beta measure? (Use SPY as the

measurement of the Market). How does the beta rank for each stock? How does this

relate to your previous answers? What is the portfolio beta (for the equally weighed)?

What does it indicate?

4. What is the required rate of return for each stock (CAPM)? What is the CAPM for the

(equally weighed) portfolio? Explain the number and put it into context? (Use the

average Risk-Free rate given below).

5. In what stock(s) (if any) should Daniel invest in? Make a recommendation of what you

would do if you were Daniel. Do you have a different portfolio construction you would

recommend? Why? Would you try something different?

Write this report in sections, make sure each section has a heading. The first section:

Introduction/Summary Section 2: Risk and Return of each individual stock (Q. 1). Section 3:

portfolio risk and return (Q. 2). Section 4: Market risk (Q. 3). Section 5: Expected Return (Q.

4). And finally, Section 6: Conclusion/Recommendation (Q. 5).

Table 1: Monthly Returns for Daniel’s Portfolio and risk-free rate

Date SPY SBUX GM VZ XPO RF

1/1/2014 -3.52% -9.26% -11.72% -2.28% -5.21% 0.04%

2/1/2014 4.55% -0.22% 0.33% 0.16% 26.16% 0.05%

3/1/2014 0.39% 3.41% -4.92% -0.02% -6.46% 0.05%

4/1/2014 0.70% -3.76% 0.17% -1.77% -7.72% 0.03%

5/1/2014 2.32% 3.71% 0.29% 8.10% -7.41% 0.03%

6/1/2014 1.58% 5.65% 4.97% -2.06% 13.89% 0.04%

7/1/2014 -1.34% 0.39% -6.83% 3.05% 7.93% 0.03%

8/1/2014 3.95% 0.17% 2.90% -0.13% 0.26% 0.03%

9/1/2014 -1.84% -3.02% -8.22% 0.34% 21.63% 0.02%

10/1/2014 2.36% 0.13% -1.69% 0.52% 5.97% 0.02%

11/1/2014 2.75% 7.48% 6.46% 1.80% -3.11% 0.02%

12/1/2014 -0.80% 1.03% 4.43% -7.53% 5.69% 0.03%

1/1/2015 -2.96% 6.68% -6.56% -2.29% -10.00% 0.03%

2/1/2015 5.62% 6.81% 14.38% 9.46% 20.01% 0.02%

3/1/2015 -2.01% 1.29% 0.51% -1.66% 2.99% 0.03%

4/1/2015 0.98% 4.71% -6.51% 3.72% 6.66% 0.02%

5/1/2015 1.29% 4.80% 2.60% -0.88% 1.36% 0.02%

6/1/2015 -2.49% 3.19% -7.34% -5.72% -8.10% 0.02%

7/1/2015 2.21% 8.04% -5.46% 0.39% -4.05% 0.03%

8/1/2015 -5.36% -3.42% -6.57% -0.51% -19.03% 0.07%

9/1/2015 -3.80% 1.59% 1.97% -5.43% -32.11% 0.02%

10/1/2015 9.03% 10.08% 16.29% 7.75% 16.49% 0.02%

11/1/2015 -0.10% -1.89% 3.70% -1.79% 9.87% 0.12%

12/1/2015 -2.31% -2.22% -6.05% 1.69% -10.66% 0.23%

1/1/2016 -4.98% 1.23% -12.85% 8.11% -16.15% 0.26%

2/1/2016 -0.08% -4.21% -0.67% 2.77% 8.36% 0.31%

3/1/2016 6.18% 2.56% 6.76% 6.60% 23.99% 0.29%

4/1/2016 0.39% -5.81% 1.18% -5.81% -1.82% 0.23%

5/1/2016 1.70% -2.38% -1.64% 0.98% -2.92% 0.27%

6/1/2016 -0.17% 4.06% -9.53% 9.71% -10.25% 0.27%

7/1/2016 3.65% 1.63% 11.45% -0.77% 12.80% 0.30%

8/1/2016 0.12% -3.14% 1.20% -4.61% 20.86% 0.30%

9/1/2016 -0.50% -3.72% -0.47% -0.67% 2.43% 0.29%

10/1/2016 -1.73% -1.98% -0.54% -7.46% -10.20% 0.33%

11/1/2016 3.68% 9.23% 9.27% 4.92% 35.23% 0.45%

12/1/2016 1.43% -4.23% 0.90% 6.97% -3.08% 0.51%

1/1/2017 1.79% -0.54% 5.08% -8.19% 3.66% 0.51%

2/1/2017 3.93% 2.99% 0.63% 2.35% 13.97% 0.52%

3/1/2017 -0.31% 2.67% -4.02% -1.77% -6.08% 0.74%

4/1/2017 0.99% 2.86% -2.04% -5.83% 3.13% 0.80%

5/1/2017 1.41% 5.91% -2.05% 2.80% 6.50% 0.89%

6/1/2017 0.15% -8.33% 2.95% -4.25% 22.87% 0.98%

7/1/2017 2.06% -7.43% 3.01% 8.37% -6.99% 1.07%

8/1/2017 0.29% 1.63% 1.56% 0.41% 1.81% 1.01%

9/1/2017 1.51% -2.10% 10.51% 3.17% 10.75% 1.03%

10/1/2017 2.36% 2.10% 6.44% -3.27% 2.32% 1.07%

11/1/2017 3.06% 5.43% 0.26% 7.58% 13.96% 1.23%

12/1/2017 0.70% -0.67% -4.87% 4.01% 15.89% 1.32%

1/1/2018 5.64% -1.08% 3.46% 2.15% 3.11% 1.41%

2/1/2018 -3.64% 0.51% -7.22% -10.70% 4.22% 1.57%

3/1/2018 -3.13% 1.38% -7.65% 0.17% 3.43% 1.70%

4/1/2018 0.52% -0.55% 1.10% 3.20% -4.57% 1.76%

5/1/2018 2.43% -1.56% 16.22% -2.19% 8.33% 1.86%

6/1/2018 0.13% -13.80% -7.73% 5.54% -4.82% 1.90%

7/1/2018 3.70% 7.25% -3.78% 2.64% -0.46% 1.96%

8/1/2018 3.19% 2.02% -4.91% 6.51% 6.80% 2.03%

9/1/2018 0.14% 6.34% -6.60% -1.80% 7.20% 2.13%

10/1/2018 -6.91% 2.52% 8.67% 6.93% -21.71% 2.25%

11/1/2018 1.85% 14.50% 3.72% 6.79% -15.13% 2.33%

12/1/2018 1.32% 1.17% 1.32% -3.55% -5.21% 2.37%

Data Source: Yahoo Finance10; Federal Reserve Bank of St Louis11

References

1. “About Bean Tock.” Bean Stock. Accessed January 05, 2019. https://starbucksbeanstock.com/en-us/about-bean-stock-en-us/.

2. “The Program That Turned Employees Into Partners Continues to Change Lives.” Starbucks Newsroom. March 26, 2014. Accessed January 05, 2019. https://news.starbucks.com/news/bean-

stock-a-program-that-turned-employees-into-partners-continues-to-chang.

3. “About GM.” About General Motors | GM.com. Accessed January 05, 2019. https://www.gm.com/our-company/about-gm.html.

4. Denning, Stephanie. “Why The General Motors Layoffs Were Strategic.” Forbes. November 29, 2018. Accessed January 05, 2019.

https://www.forbes.com/sites/stephaniedenning/2018/11/29/why-the-general-motors-layoffs-

were-strategic/#635dfaca5d5e.

5. “OUR COMPANY.” XPO Logistics. Accessed January 05, 2019. https://www.xpo.com/about- us/our-company.

6. “Who We Are.” About Verizon. September 09, 2018. Accessed January 05, 2019. https://www.verizon.com/about/our-company/who-we-are.

7. “Building Brands People Love.” About Verizon. July 12, 2018. Accessed January 05, 2019. https://www.verizon.com/about/our-company/video-advertising.

8. “What Is 5G?” About Verizon. December 27, 2018. Accessed January 05, 2019. https://www.verizon.com/about/our-company/5g/what-5g.

9. “Starbucks Company Profile.” Starbucks Coffee Company. Accessed January 05, 2019. https://www.starbucks.com/about-us/company-information/starbucks-company-profile.

10. “3-Month Treasury Bill: Secondary Market Rate.” FRED. January 02, 2019. Accessed January 06, 2019. https://fred.stlouisfed.org/series/TB3MS.

11. “Yahoo Finance – Business Finance, Stock Market, Quotes, News.” Yahoo! Finance. Accessed January 06, 2019. https://finance.yahoo.com/.

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