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081063 Securities and Investments Securities and Investments (ebook) : Securities and Investments Lesson 7 Overview The purpose of this graded project is to give you the opportunity to use the skills you’ve learned throughout this course in a series of real-world applications. The three parts of this project require you to analyze portfolios containing a number of securities using a variety of analysis tools. The skills you’ll demonstrate in this graded project are essential to becoming a successful financial manager. Record your answers in a Word document with the question numbers clearly labeled. Show your calculations or calculator inputs when indicated for full credit. Perform all work using equations and a calculator. Do not submit or use an Excel spreadsheet to calculate your answers. 7.1 Develop the ability to perform investments calculations and analysis related to this course Graded Project: Securities and Investments READING ASSIGNMENT Your project must be submitted as a Word document (.docx, .doc)*. Your project will be individually graded by your instructor and therefore will take up to a few weeks to grade. Be sure that each of your files contains the following information: Your name Your student ID number Securities and Investments (ebook) (v1) : Lesson 7 : Page 1© 2020 Penn Foster Inc. The exam number Your email address To submit your graded project, follow these steps: Log in to your student portal. Click on Take Exam next to the lesson you’re working on. Find the exam number for your project at the top of the Project Upload page. Follow the instructions provided to complete your exam. Be sure to keep a backup copy of any files you submit to the school! Part 1: Sector Performance Investment managers strive to outperform both the sector they focus on and broad market indexes such as the S&P 500. The performance of a portfolio is determined by both the weightings given to different types of investments as well as the actual performance of these investments. In addition, the level of risk an investor is willing to take on will impact the design of a portfolio. To answer the questions in Part 1, you’ll use the information provided about the portfolio in the table below. The portfolio is broken out by sectors and shows the investor’s portfolio’s weighting and performance and the S&P 500’s weighting and performance in each sector. The final column shows the individual investments’ overall contributions to the portfolio. Note that an investment can underperform the S&P and still have a positive contribution to the portfolio based on the difference in weighting. Portfolio Information Sector (1) Portfolio Weighting (2) S&P Weighting (3) Differen- ces in Weighting (4) Portfolio Return (5) S&P Return (6) Sector Over-or Under- Perform ance (7) = (3) x (6) Sector Allocation Contributions Securities and Investments (ebook) (v1) : Lesson 7 : Page 2© 2020 Penn Foster Inc. Telecom- munications Services 3.10% 5.90% a. ? 2.50% 3.10% k. ? u. ? Utilities 7.50% 3.80% b. ? 3.10% 1.90% l. ? v. ? Information Technology 14.30% 17.90% c. ? 4.90% 3.20% m. ? w. ? Materials 6.30% 3.70% d. ? 4.80% 5.10% n. ? x. ? Financials 13.40% 17.10% e. ? 6.20% 4.80% o. ? y. ? Consumer Discretionary 12.70% 13.50% f. ? 2.10% 4.00% p. ? z. ? Industrials 14.10% 11.90% g. ? 4.90% 3.10% q. ? aa. ? Energy 8.40% 8.00% h. ? 3.70% 8.60% r. ? bb. ? Healthcare 15.30% 11.70% i. ? 9.80% 5.70% s. ? cc. ? Consumer Staples 4.90% 6.50% j. ? 1.50% 13.20% t. ? dd. ? 1. Fill in the missing values in the table above for a quarterly comparison of sectors with the S&P 500 Index. Remember when performing calculations that the numbers shown are percentage values. Record your answers as percentage values to two decimal places. a. _______ k. _______ u. _______ b. _______ l. _______ v. _______ c. _______ m. _______ w. _______ d. _______ n. _______ x. _______ e. _______ o. _______ y. _______ f. _______ p. _______ z. _______ g. _______ q. _______ aa. _______ Securities and Investments (ebook) (v1) : Lesson 7 : Page 3© 2020 Penn Foster Inc. h. _______ r. _______ bb. _______ i. _______ s. _______ cc. _______ j. _______ t. _______ dd. _______ 2. Did the performance turned in by the investment manager underperform or outperform the S&P 500? By how much? Show your work. 3. Which sector turned in the greatest positive contribution to the portfolio’s performance? Explain why this investment made the greatest positive contribution based on the differences in weighting and the sector over- or under- performance. 4. Which sector made the greatest negative contribution to the portfolio’s performance? Explain why this investment made the greatest negative contribution based on the differences in weighting and the sector over- or under- performance. Part 2: Portfolio Analysis Use the three portfolios shown below to answer questions 5–8 in Part 2. Portfolio 1 Security Amount Invested Expected Return Beta Security A $ 4,000 9% .80 Security B $ 5,000 12% 1.15 Security C $ 12,000 14% .95 Security D $ 8,000 15% 1.23 Portfolio 2 Securities and Investments (ebook) (v1) : Lesson 7 : Page 4© 2020 Penn Foster Inc. Security Amount Invested Expected Return Beta Security A $ 3,000 16% 1.22 Security B $ 11,000 13% 1.54 Security C $ 9,000 8% .87 Security D $ 6,000 11% .81 Portfolio 3 Security Amount Invested Expected Return Beta Security A $15,000 10% 1.72 Security B $12,000 9% .81 Security C $ 3,000 12% .72 Security D $ 2,000 15% 1.54 5. Based on beta, which portfolio has the highest level of systematic risk? Show your work. 6. If the risk-free rate is 5.5 percent, which of these portfolios has the highest reward-to-risk ratio? Show your work. 7. Suppose that the risk-free rate is 5.5 percent, the return over three years for each portfolio matches its expected return, and the portfolios have 3- year annual return standard deviations as follows: Portfolio 1 22% Portfolio 2 26% Portfolio 3 18% If you were restricted to selecting one of the three portfolios to invest all your money in, which should you choose based on that portfolio having Securities and Investments (ebook) (v1) : Lesson 7 : Page 5© 2020 Penn Foster Inc. the best ratio of excess return per unit of total risk as measured by its Sharpe ratio? 8. Suppose that the actual returns for Portfolios 1, 2, and 3 were as follows: Portfolio 1 11.3 Portfolio 2 12.5 Portfolio 3 9.4 Also, assume that the risk-free rate was 5.5 percent and the average return on the market portfolio was 8 percent. a. Which of the three portfolios has the highest Jensen’s alpha? Show your work. b. Which has the highest Treynor ratio? Show your work. Part 3: Selecting a Portfolio Use the two portfolios shown in the tables below to answer the questions in Part 3. Portfolio 1 Asset Category Percentage of Portfolio U.S. small-company stocks 5 U.S. large-company stocks 10 International stocks 5 U.S. government bonds 50 U.S. corporate bonds 30 Portfolio 2 Securities and Investments (ebook) (v1) : Lesson 7 : Page 6© 2020 Penn Foster Inc. Asset Category Percentage of Portfolio U.S. small-company stocks 20 U.S. large-company stocks 30 International stocks 25 U.S. government bonds 15 U.S. corporate bonds 10 9. In your role as a financial advisor, you’re advising a client, Sally, a 30- year old computer programmer who makes an above-average salary. She’s investing money in her 401(k) that she doesn’t plan to use until retirement. In your opinion, which of the two portfolios above would be most appropriate for these funds? In your answer, explain why you believe the portfolio you’ve chosen is appropriate and explain why the portfolio you didn’t choose is not appropriate. 10. In your role as a financial advisor, you’re advising a client, Bob, who has just retired and rolled over his 401(k) into a self-directed IRA account. Bob intends to use these funds to provide income to live on in his retirement. In your opinion, which of the two portfolios above would be most appropriate for these funds? In your answer, explain why you believe the portfolio you’ve chosen is appropriate and explain why the portfolio you didn’t choose is not appropriate. SCORING GUIDELINES Your project will be graded according to the criteria found in the rubric below. Rubric Securities and Investments (ebook) (v1) : Lesson 7 : Page 7© 2020 Penn Foster Inc. Securities and Investments Graded Project Skill/ Grading Criteria Excellent Good Satisfactory Poor GraderComments Part 1 Question 1 All answers are correct. 30 Many of the answers are correct. 29 Some of the answers are correct. 28–26 Few or none of the answers are correct. 25–0 Question 2 The answer and explanation are correct, and calculations are shown. 5 The answer is correct, but the explanation or calculations are incorrect. 4 The answer is correct, but the calculations or explanation is not shown. 3 The answer is incorrect, and the explanation and calculations are not shown. 2–0 Question 3 The answer and explanation are correct. 5 The answer is correct, but the explanation is incorrect. 4 The answer is correct, but the explanation is not shown. 3 The answer is incorrect and/or the explanation is not shown. 2–0 Question 4 The answer and explanation are correct. 5 The answer is correct, but the explanation is incorrect. 4 The answer is correct, but the explanation is not shown. 3 The answer is incorrect and/or the explanation is not shown. 2–0 Part 2 Question 5 The answer is correct and the correct calculations are shown. 10 The answer is correct and the cal- culations are incorrect, or the answer is incorrect but the calculations are correct. 9 The answer is correct, but the calculations are not shown. 8–7 The answer is incorrect and/or the calculations are not shown. 6–0 Securities and Investments (ebook) (v1) : Lesson 7 : Page 8© 2020 Penn Foster Inc. Question 6 The answer is correct, and the correct calculations