Last Updated 14 Apr 2020

Intermediate Financial Management

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BA – 316 Project Part 1 Identify a company Look at financial statements (from previous years, at least one year) Conduct ratio analysis. Use Dupont equation from results..

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. Part 2 Forecasting – Statistical Analysis Standard Goal of 10% Determine location of new funds (borrowing, issuance of stocks, capital) ? page to 1 page proposal before starting project Chapter 2 Homework – (5 , 9) & Mini Case (a – i), (#12 for 08/31) *Mini Case (j – m) for 09/12 Correlation Coefficient -> Degree of variability Possibilities of economy on investments ProbabilityRate of Return A Pessimistic. 2513% Likely. 5015% Optimistic. 2517% Realized Rate of Return & Correlation Coefficient ***Calculate Correlation of Coefficient for these stocks Stocks X, Y, and Z Year 1Year 2Year 3Year 4Year 5Avg? X8%10%12%14%16%12%3. 16 Y16%14%12%10%8%12%3. 16 Z8%10%12%14%16%12%3. 16 Correlation – A statistical measure of the relationship between the rates of return of two assets

Correlation Coefficient – A statistical measure of the degree of the relationship between the rates of return of two assets. Positively Correlated – Describes two rates of return that move in the same direction Negatively Correlated- Describes two rates of return that move in opposite directions ?= t=1n(ri,t-ri,avg)(rj,t - rj,avg)t=1nri,t-ri,avg2t=1nrj,t - rj,avg2 Yearr ? xryrz 18%16%8%Rxy= 2101410 3121212Rxz= 4141014 516816 Diversifiable Risk Company-specific risk Unsystematic risk S&P, NASDAQ, Dow Jones Non-Diversifiable Risk Market Risk

Systematic Risk The risk of a portfolio depends on the correlation coefficient of returns on the assets within the portfolio. 1. If rate of return of two assets are perfectly positively correlated, R = 1 2. If rate of return of two assets are perfectly negatively correlated, R = -1 3. If rate of return of two assets are independent, -1 < R < 1 Beta Coefficient – b Measure of the risk that one asset can contribute to a portfolio ry = a + b(rM) When beta is positive, it means that the stock moves with the market And vice-versa if beta is negative

Beta measures the non-diversifiable risk of an asset. Find Correlation Coefficient (as a portfolio) Calculate beta - Use S&P What should be the risk of the portfolio? **Pick a pair Exxon & BP Walmart & Kroger Verizon & AT&T Toyota & Ford CAPM – Capital Asset Pricing Model A model that describes the relationship between the required rate of return and the non-diversifiable risk of a portfolio rMrxryrz 55102. 5 1010205 1515307. 5 20204010 25255012. 5 30306015 r17. 517. 5358. 75 b1120. 50 ?111 bx= ? rx? rm? xm = ? x? m? xm

SML Equation - ri = rrf + (rm - rrf)bi IF rm = 9% RRF = 3% bA = 0. 5 bB= 1 bC= 2 Slope of SML line provides the riskiness of the market, aka market risk premium. Chapter 3 – page 76 Optimal Portfolio Homework (#7) Covariance COVAB = i=1nrAi- rArBi- rBPi ProbabilityAsset AAsset BAsset CAsset DAsset E .158%4%12%2%4% .20861046 .3088878 .2081061210 .1581241612 r ? 88888 ?02. 522. 524. 662. 52 COV COVxy= ? x ? y(? xy) Solve COVBD, COVBE, COVCD Calculate risk without beta ?p= wx2? x2+(1-w)y2? y2+2w(1-w)? xy? x? y Two key factors for investing How much is the rate of return

What is the risk involved If COV is large & positive Portfolio standard deviation will be between the two stand-alone deviations If COV is large & negative Portfolio standard deviation will be minimized (lower than the lowest one) Analyzing portfolio options Asset AAsset B r ? 5%8% ?410 wawbr ? p 100%05. 0 75%25%5. 75 50%50%6. 5 25%75%7. 25 0100%8. 0 ?p ?ab = 1? ab = 0? ab = -1 Linear relationship between increases in portion changes of asset A vs. asset B Percentage change in risk also remains constant if perfectly positively or perfectly negatively correlated

Look into financial statements for project, bring to class 09-28 r ? A = 5% ?A = 4% r ? B = 8% ?B = 10% wAwbr ?? ab = 1? ab = 0 ? ab = -1 100%0%5%444 75255. 755. 53. 90. 5 50506. 57. 05. 43. 0 25757. 258. 57. 66. 5 01008. 010. 010. 010. 0 Plot rate of return on y-axis and risk on x-axis The feasible set will be determined Most Efficient portfolio Provides maximum expected rate of return with the least risk

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