The project is divided into two milestones.
Milestone One: Client Analysis (attached)Milestone Two: Stock Analysis and Portfolio Development (attached)
Final Submission: Portfolio and RationaleIn Module Seven, you will submit your portfolio and rationale. It should be a complete, polished artifact containing all of the critical elements of the final product. . This milestone will be graded using the Final Project Rubric.
Additional files, guidelines and instructions attached for reference.
Running head: CLIENT ANALYSIS1 CLIENT ANALYSIS4 3-1 Final Project Milestone One: Client Analysis Southern New Hampshire University FIN-340 Fundamentals of Investments Instructor Name Date Client 1 Risk Tolerance When investing there is a certain level of risk tolerance individuals attempt to mitigate. In risk management, the focus is not always striving to alleviate risks because risk-taking is the foundation of personal and business gains. Rather, the goal of risk management is normally to optimize risk rewards for a given level of risk tolerance. Ezra’s risk tolerance could be considered that of a moderate risk investor due in part to his set percentage of losses he can handle (30-40%). On the other hand, Ezra can also be deemed a low-risk investor because he does not tolerate any loss of capital and sticks to moderately safe ventures like the insured savings account. Return Objectives We all know that with greater risks come greater returns and lower risks yield smaller returns. Understandably, Ezra seems to prefer low risks; made obvious by the fact that he is only willing to lose 30-40% of his invested capital. To be deemed high-risk tolerance Ezra would be prepared to lose up to 50% of his capital. Liquidity Objectives Liquidity management is the fundamental concept of being readily able to fund short-term investments, buy goods and services, and pay debts that might occur unexpectedly. Ezra’s cash savings totaling almost $20,000 gives him almost enough money to fund these expenses. Classification Based on Ezra’s scenario, he can be classified under the growth category. Since stocks are classified as capital assets, then by definition, one can achieve growth through selling assets. By barring dividends, Ezra can have adequate cash to realize gains. Moreover, he has the following two options for stocks: blue-chip and growth stocks. Generally, blue-chip stocks are the better of the two for Ezra; this is due to their reasonable safety, capital growth in the long-term, and modest dividend income. Stock profits will prove to have a lower tax rate advantage if held for one year because they will be taxed at the rate of capital gains as opposed to income tax rates. also has the opportunity to grow steadily over the years by making low-risk investments. Therefore, investing the $60,000 windfall on blue-chip stocks can produce great growth potential. Client 2 Risk Tolerance The risk tolerance of Jacob and Rachel could be deemed moderately aggressive. This risk tolerance is based on the couple preference of asset classes with dynamic price movements like equities, which accounts for 70-75% of their portfolio. Their interest in bond yields “what do bond yields look like today?” confirms their willingness to invest in securities that can create returns quickly. The couple also confirms that they are prepared for some aggressive money moves as they “need to plan for some growth in retirement.” Return objectives Rachel and Jacob’s main objective is to get as much return as possible on their portfolio while preserving their already earned capital. Having saved and accumulated $900,000 already, coupled with their age in the early 50s, this objective makes sense. Liquidity objectives The couple managed to amass $900,000 through portfolio growth and savings all while funding their children’s education. However, it seems like they are running out of cash. Jacob and Rachel are in a dilemma when it comes to their children. With two of the four already in college attempting to cover all those expenses out of pocket will not leave much for them to save over the next six to eight years. Classification The couple is working hard to preserve their capital. This capital preservation is a priority for retired individuals or people approaching retirement because they may depend on their investments to supplement their living expenses. Since retirees want to make sure they do not outlive their retirement savings, they normally rely on minimal risk investments such as high yield savings accounts or U.S. Treasury securities. Investing in U.S. Treasury securities in stable economic conditions remains the best option for them. It is a sure bet because they will only lose their investment if the government collapses. Next in the safety line is the Triple A-rated corporate bonds issued by stable and large organizations such as IBM. With corporate bonds, they can preserve their principal while they receive pre-set interest rates. Running head: STOCK ANALYSIS AND PORTFOLIO DEVELOPMENT1 STOCK ANALYSIS AND PORTFOLIO DEVELOPMENT6 5-1 Final Project Milestone Two: Stock Analysis and Portfolio Development Tanekai D. Echols Southern New Hampshire University FIN-340 Fundamentals of Investments Instructor Matoshia Freeman, MBA 114 April 2021 Stock analysis The selected five stocks to be analyzedied for analysis includeare IBM, BAXKO, BMY, MMM, ORCL, and MMM BMY. In this analysis the value of Tthe aforementioned stocks will be determined by applying one of the following stock valuation methods: the price to multiple model, the dividend valuation model, and the free cash flow to equity valuation model. Being able to calculate the values of stock can help investors make more informed decisions with their money. Symbol Estimated Beta Dividends Earnings Sales Free Cash Flow 5-Year Dividend Growth Average Industry P/E Ratio Average Industry P/S Ratio Free Cash Flow Growth IBM 0.86 6.52 Use Last Year Use Last Year Use Last Year 13.7 23.7 1.12 2.60% KO 0.66 Use Last Year Use Last Year Use Last Year Use Last Year 8.3 22.6 2.2 6.50% BMY 0.78 Use Last Year Use Last Year Use Last Year Use Last Year 2.9 24.4 3.37 N/A ORCL 1.1 Use Last Year Use Last Year Use Last Year Use Last Year 21.1 20.5 4.45 10% MMM 0.98 Use Last Year Use Last Year Use Last Year Use Last Year 15.1 23.8 2.59 7% IBM has a stock value of 94.36 (F6, Stock Value) and an expected return of 7.85% (H6, KO has a stock value of 28.59 (F12, WB1) and an expected return of 6.20 (H12, WB1). The price to multiple ratio for valuing a company that measures its current share price relative to its per-share earnings. the dividend valuation model. The formula for this method "Stock value = Dividend per share / (Required Rate of Return – Dividend Growth Rate)." have an expected return of 9% and a risk-free rate of 0.75% from the research. ORCL stock has the highest free cash flow growth of 10 percent, which implies the best investment stock for short term earnings. According to Motley Fool. (2016), it means the company's cash balance after expenditure is growing at a high rate, resulting from the decline of spending and an increase in returns. MMM's free cash flow grows at the rate of 7%; hence its performance promises high returns to investors. It recorded high sales in the 2019 financial year of around $7.6 billion with $8.9 billion. IBM security has less growth rate of free cash flow of 2.6 percent, accompanied by high earnings of $9.4 billion. It implies that despite the increased revenue, the company has high expenditure costs, which results in a low growth of free cash flow. The assets, therefore, promise high returns both in the long-run and in the short-run. The stocks have the potential for profitability despite the market variation due to low market risk. Also, the markets indicate high stability, which signifies low chances risks to investors. We use the dividend valuation model, which is: computed as; "Stock value = Dividend per share / (Required Rate of Return – Dividend Growth Rate." The dividend valuation model is reliable and provides verifiable data because most corporates companies increase dividends as revenue and income increase. An increase in dDividend per share reflects growth in the corporate's income. The expected return from each of the five selected stocks shows promises positive results; hence the store selected promises and would yield an investorthe investor's high profits. The expected returns computation can be calculated by using used the following formula of “ "Expected return = Risk-Free Rate + [Beta x Market Return Premium].," as shown in the appendix. It should be noted that because Tthe expected return for the five selectedchosen stock is positivehigh/positive, and high, which motivates investors. Tthe estimated risk is very quite low for the stores since the market shows exhibits stability with less little fluctuation. Portfolio development Jacob and Rachel’s objective includes generating a high return while taking into consideration that they are nearing retirement. Couple their age with the expenses of their children’s college education, they should seek options that are not too volatile for more stable returns. Based on this information their The couple would settle with IBM provident stocks from the assets provided because their risk tolerance is moderately aggressive. Jacob and Rach further evident by the dedication ofel desire asset classes with dynamic price movements like 70-75% of their portfolios to equities. Their focus inquiry regardingis on how the bond yie bond yields look currently, which ascertainsprovides some insight into the couple’s their securities preference as well and quickly generates returns. and corporates offer less risky assets with reasonably high returns, making them an ideal choice for Jacob and Rachel. The stocks include high-paying dividends and bonds with high-yield. Therefore, IBM and MMM's choice would Both suit the couplethem as these stocks include high-paying dividends and bonds with high-yield which would and help fulfill their objective and earn generate moderate returns. However, Securities have highly risky because they create returns quickly. The couple is also very aggressive and states that they could work until they reach 90, an attitude that promises high returns. The couple says that they can't afford to take a big hit in their portfolio. They have less time to recover, which proposes they are not ready to take a risk since they will not have recovery time. IBM and corporates offer less risky assets with reasonably high returns, making them the best choice for Jacob and Rachel. “Expected return portfolio = beta *(Expected return –Risk free rate) + Risk free rate” From our computation of expected return portfolio uUsing the CAPM beta model formula of “beta *(Expected return –Risk free rate) + Risk free rate,”, the couple should expect a return of at least 18% using the IBM corporate stocks to compensate for the given risk level. according to Magnimetric. (2020), the risk-free return stands very low; hence the expected return is determined by the beta values, contributing to the movement of the exceptional risk percentage of the model beyond the predictable market return to 8%. The model does not always predict the performance of an investment portfolio but can predict returns.