Group: Chia Ching Ng, Li Jing Lu
Professor William C. Johnson
Final assignment: Portfolio Project
December 6, 2012
We changed our strategy after the first interim report. We realized that it is hard to use “bottom-up” approach to invest by looking into a particular stock to invest. Right now, we are trying to use “top-down” approach to invest in our portfolio. Top-down approach is a method of analysis that involves looking at the "big picture" first, and then analyzing the details of sector or industry then towards the company or stocks. By first analyzing the overall picture, such as a macroeconomic trend, we can start narrowing potential companies to invest. ...view middle of the document...
The stability nature of this sector can help reduce the risk of our total portfolio.
In addition to looking at the ratios to get an idea of what sectors in which we should invest, we also look at the characteristics of the sector. As we mentioned in the economy analysis, there are some indicators have signaled that consumer confident is starting to pick up. Activities in service sector include cyclical industries, such as home improvement stores and delivery services. Home improvement stores will benefit if housing starts increase, and delivery services will benefit if small businesses are doing well.
Another sector that we think will have a good prospect is consumer goods. This sector includes personal products, beverages, etc. Some of the industries included in this sector are considered non-cyclical. It means that even if the economy does not perform as well as we expected. The macroeconomic environment will less likely affect those non-cyclical industries. The demand for products in these two industries is more inelastic, meaning that people are less sensitive to the price change and less affected by their income change.
The last sector in which we decided to invest is conglomerates. Industries fall into this sector usually offer very well-diversified product lines. As a result, companies that are considered as conglomerate should have very low risk and stable return in running their business. However, the drawback of investing in conglomerates is the expected low growth rate. Because conglomerate companies have many product lines, it means that it is hard to for them to expand and investors should not expect to earn a very high abnormal return by investing in those companies.
Overall, our portfolio didn’t perform as well as the benchmark S&P 500 and dart portfolio. We gained a return of -3.98% while SP500 had a return -0.12%; Benchmark A had a return of -2.96 and Benchmark B had a return of 0.69. Our portfolio includes three industries: technology, energy and consumer goods and service. Therefore I think it’s most comparable that we choose S&P500 and Nasdaq as our benchmarks and we compare the value of our benchmarks and our own portfolio. According to the data and the graph we worked out, we have outperformed Nasdaq from 10/22-11/26 and ours outperformed both on 11/14. Please refer to our graph 1 for details. The reason we think S&P 500 and Nasdaq could be a good benchmarks is that there are many tech stocks, consumer goods and service stocks and energy stocks just as ours does. I think one of the reason our portfolio...