Introduction
J&PInvestments is a newly formed portfolio management company. Our company held and managed a $1,000,000 portfolio, conducting 19 trades from September 27th, 2016 to November 15th, 2016. At the end of the trading period, the total return on our portfolio was 0.01%, our holdings as of November 15th, 2016 can be viewed in Appendix A. The purpose of this exercise was to observe how stocks move. We have included justifications for the stocks we chose, an analysis of the portfolio’s overall performance, and the associated risk characteristics. Furthermore, we examine Golar LNG Partners LP (GMLP) to better understand and compute a stock’s dividend growth model, CAPM, and P/E analysis.
Discussion and Analysis
Strategy
When we began our …show more content…
These elements are known as market risk and firm-specific risk. Market risk, or systematic risk, is the potential losses within a portfolio that are caused by factors affecting the financial markets. This type of risk cannot be mitigated through portfolio diversification. On the other hand, firm-specific risk, or unsystematic risk, can be diversified away by holding 30 or more stocks in a portfolio. An investor can purchase securities in other companies to offset the associated risks.
Market- Specific and Systematic Risk
Volatility of day-to-day stock prices give rise to market risk. A major systematic risk our portfolio faced over the trading period was the US election that took place on November 8th, 2016. Following the election of Donald Trump, our shares in Google, Microsoft and Apple all plummeted. Many investors became fearful of Trump’s unconventional policy positions and how that would begin affecting the financial and economic markets. In particular, investors believe that under Trump’s presidency and his policy changes:
• Higher inflation will lead to higher costs; therefore, consumers will have reduced spending …show more content…
Using the growth rate we found above, we calculate the EPS to be $2.81. We determined the arithmetic average of the P/E ratio over the last four years, which was 10.83, to find the effect growth has on stock price. From here, we calculated the stock price to be $30.41 after growth. These calculations can all be found in Appendix E.
Valuation
To determine whether Golar was overvalued or undervalued we compared the intrinsic value of the stock, using the growth rate and required rate of return we found, with the price found on NASDAQ.
The intrinsic value is as follows:
Intrinsic Value = Dividend * (1+ Dividend Growth Rate) / (Required Rate of Return – Dividend Growth Rate)
V0 = D0 * (1+g)/(k-g)
V0 = $2.31 * (1+0.0683) / (0.2077-0.0683)
V0 = $17.70
In comparison to Golar’s Intrinsic Value of $17.70, NASDAQ’s current value of Golar is $21.21 (Yahoo Finance, 2016). This comparison shows that that Golar is overvalued; however, we purchased this stock as we believed there was still potential for gains to be made. This is otherwise known as a speculative
J&PInvestments is a newly formed portfolio management company. Our company held and managed a $1,000,000 portfolio, conducting 19 trades from September 27th, 2016 to November 15th, 2016. At the end of the trading period, the total return on our portfolio was 0.01%, our holdings as of November 15th, 2016 can be viewed in Appendix A. The purpose of this exercise was to observe how stocks move. We have included justifications for the stocks we chose, an analysis of the portfolio’s overall performance, and the associated risk characteristics. Furthermore, we examine Golar LNG Partners LP (GMLP) to better understand and compute a stock’s dividend growth model, CAPM, and P/E analysis.
Discussion and Analysis
Strategy
When we began our …show more content…
These elements are known as market risk and firm-specific risk. Market risk, or systematic risk, is the potential losses within a portfolio that are caused by factors affecting the financial markets. This type of risk cannot be mitigated through portfolio diversification. On the other hand, firm-specific risk, or unsystematic risk, can be diversified away by holding 30 or more stocks in a portfolio. An investor can purchase securities in other companies to offset the associated risks.
Market- Specific and Systematic Risk
Volatility of day-to-day stock prices give rise to market risk. A major systematic risk our portfolio faced over the trading period was the US election that took place on November 8th, 2016. Following the election of Donald Trump, our shares in Google, Microsoft and Apple all plummeted. Many investors became fearful of Trump’s unconventional policy positions and how that would begin affecting the financial and economic markets. In particular, investors believe that under Trump’s presidency and his policy changes:
• Higher inflation will lead to higher costs; therefore, consumers will have reduced spending …show more content…
Using the growth rate we found above, we calculate the EPS to be $2.81. We determined the arithmetic average of the P/E ratio over the last four years, which was 10.83, to find the effect growth has on stock price. From here, we calculated the stock price to be $30.41 after growth. These calculations can all be found in Appendix E.
Valuation
To determine whether Golar was overvalued or undervalued we compared the intrinsic value of the stock, using the growth rate and required rate of return we found, with the price found on NASDAQ.
The intrinsic value is as follows:
Intrinsic Value = Dividend * (1+ Dividend Growth Rate) / (Required Rate of Return – Dividend Growth Rate)
V0 = D0 * (1+g)/(k-g)
V0 = $2.31 * (1+0.0683) / (0.2077-0.0683)
V0 = $17.70
In comparison to Golar’s Intrinsic Value of $17.70, NASDAQ’s current value of Golar is $21.21 (Yahoo Finance, 2016). This comparison shows that that Golar is overvalued; however, we purchased this stock as we believed there was still potential for gains to be made. This is otherwise known as a speculative