Course Learning Assessment 2 – CLO 1, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7
This is a complete written report of your portfolio formation in a Word document. Your historical data and relevant derived values in tables can be pasted from your previous calculations in the Excel spreadsheet. Please provide explanations of all calculations and the justifications in Word format. Make sure to also paste all underlying Excel formulae that you used for calculations in the Word document.
- Once again, provide the data that you presented in answering Part 2 of Professional Assignment 2.
- Calculate the mean, variance, and the standard deviation of each security’s annual rate of return.
- Calculate the correlation coefficient between every possible pair of securities’ annual rates of return.
- Choose percentages of your initial investment that you want to allocate amongst the five (5) securities (weights in the portfolio).
- Create embedded formulae which generate statistical properties of the portfolio upon insertion of the weights.
- Observe the mean, the standard deviation, and the CV of the annual rate of return of the portfolio.
- Find the combination of the weights that minimizes CV of the portfolio.
- How does the CV of the optimal portfolio compare with the CVs of its constituents?
- What is the expected rate of return and standard deviation of the rate of return of the portfolio?
- Choose different values within the range of the standard deviation of the portfolio, and for each chosen value, locate the corresponding point on the efficient frontier by finding the weights that maximize the expected rate of return of the portfolio.
- Subsequently, construct the efficient frontier of your portfolio.
- Assume that you initially invested $1,000,000 in the portfolio and that the distribution of the annual rate of return of the portfolio is normal.
- What is the distribution of the return of the portfolio 20 years after its formation?
- Provide the graph of the distribution of the return of the portfolio.
Provide your explanations and definitions in detail and be precise. Comment on your findings. Provide references for content when necessary.
2
Business Finance Professional Assignment 2
Guang Yang
Westcliff University
Shawn Spath
BUS 550 Managerial Finance
06-11-2023
Business Finance
Part 1
Introduction
Evaluating the historical financial information of a company is critical in understanding and projecting its future performance. More specifically the historical stock price of a company is important as it provides insight to current and potential investors on the return on investment of the company which provides a foundation for decision making. In this regard this report evaluates Apple Inc historical stock performance. More importantly the report provides the estimated cost of capital of the company based on a 20 years historical data of the company as well as the most recent financial statements.
Overview of Apple Inc.
Apple Inc is an American multinational corporation that is famous for the production of computers and consumer electronics. The company produces, and sells wearable technology, smartphones, tablets, and personal computers. In addition, the business provides digital material from third parties as well as accessories, software, and related services (Lessambo, 2022). Some of the famous products of the company include but are not limited to, iPhone, iPad, Mac, iPod, Apple Watch, and Apple TV are among Apple's product lines. The company generated a total revenue of $ 394.328billion in the financial year ended 9/29/2022 and had a net income of $ 99.8billion
Apple Inc Beta
Beta is an important yardstick in evaluating the performance of the company’s stock. It provides a measure of variability in the company’s stock return. Beta gauges a stock's volatility, the degree to which its price changes in proportion to the entire stock market (Jeffers & Posenau,2022). It conveys a measure of the stock's risk compared to that of the wider markets. Besides, beta is used to contrast the market risk of a stock with that of other stocks.
|
|
Coefficients |
|
Intercept |
0.02274598 |
|
X Variable 1 |
1.252679015 |
|
Apple Beta |
When a company has a beta that is more than 1 it indicates the stock is more volatile than the market. The regression analysis of the Apple Inc, stock return for the last 20 years, the beta of the company is 1.25. This shows that Apple stock is 25% more volatile than the market. However, it should be noted that technology companies such as Apple tend to have higher beta than the market benchmark. These companies often make investments in novel projects and they tend to have high debt-equity ratios are they often seek more capital to fund the research and development project. For instance, Apple has a debt capital of $ 98.956billion against equity of $ 50.672billion (Yahoo Finance,2022).
WACC of Apple.
The weighted average cost of capital in important indicator of the company’s performance. WACC measures the cost of raising capital as such it assumes that a firm’s capital structure is composed of both debt and equity (Romeijnders & Mulder,2022).
|
Apple Inc. Expected annual rate of return |
|
|
INPUT DATA |
|
|
Risk free rate of the US treasury bonds |
3.73% |
|
Beta of Apple |
1.253948015 |
|
The current market return (S&P 500) |
11.34% |
|
Apple Inc expected annual return (CAPM model) |
13.3% |
|
Calculation of WACC |
|
|
Estimated annual cost of debt |
4.88% |
|
Cost of equity |
13.3% |
|
Value of equity |
$ 50,672,000 |
|
Value of debt |
$ 98,959,000 |
|
Total capital |
$ 149,631,000 |
|
Weight of equity |
0.338646403 |
|
Weight of debt |
0.661353597 |
|
The corporation tax rate |
21% |
|
WACC |
7% |
The capital structure of Apple shows that the company more debt than equity. The above calculations shows that the proportion of debt in the company’s capital structure is 0.66. On the other hand the proportion of equity is 0.33 as such multiplied by respective cost of capital and summed the weighted average cost of capital of Apple is 7%. This means that despite the company’s high debt, it can still raise capital at relatively lower cost (Fridson & Alvarez,2022).This gives it advantage of getting more funds to finance its projects.
Part 2
This section provides the results of expected return of five companies. The companies chosen for this analysis include, Ford Motors, Verizon Communication, Nike, Exxon Mobil and PepsiCo. The analysis of the companies expected return is based on the 20years historical stock prices of the companies.
The results of the calculation of annual returns of the five companies shows varying performance. For instance, the return of Ford Motors company for the month of may 2023 has been highest at 13.2% while Verizon and PepsiCo registered negative returns over the same period. On the other hand, Nike and Exxon Mobile posted returns of 0.9% and 6.8% respectively.
References
Fridson, M. S., & Alvarez, F. (2022). Financial statement analysis: a practitioner's guide. John Wiley & Sons.
Lessambo, F. I. (2022). Apple and Microsoft. In Financial Statements: Analysis, Reporting and Valuation (pp. 369-399). Cham: Springer International Publishing.
Fridson, M. S., & Alvarez, F. (2022). Financial statement analysis: a practitioner's guide. John Wiley & Sons.
Jeffers, J., Lyu, T., & Posenau, K. (2022). The risk and return of impact investing funds. Available at SSRN 3949530.
Romeijnders, W., & Mulder, M. (2022). Optimal WACC in tariff regulation under uncertainty. Journal of Regulatory Economics, 61(2), 89-107.
Yahoo Finance (2022) https://finance.yahoo.com/quote/AAPL?p=AAPL&.tsrc=fin-srch
Calculation References：