Daniel’s Portfolio Risk and Return Case Daniel is a part-time Starbucks barista and finance student

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Daniel’s Portfolio Risk and Return Case Daniel is a part-time Starbucks barista and finance student. As a Starbucks employee, part of his wages was paid in form of RSUs (restricted stock unit)1 . Theses RSUs, also known as Bean Stock will be turned into shares after the employee has worked for 2 continuous years in Starbucks. The reason behind the Bean Stock program is to “turn employees into partners” so that employees can “share in their financial success2 .” After the vesting period of 2 years, the employee can decide whether to keep the stock or sell the stocks. Daniel has kept his stock for the last 5 years. As a finance student, he knows the importance of time value of money and investing early for retirement. In class he learned that the longer the money has time to accrue the more that investment will grow. He also knows that there are different investment vehicles that give different return on investment. One of the first things he learned was the risk and return concept. To make high returns he has to be willing to take some risk. He could put his money into a savings account or a money market, a very safe and liquid account, or he could take extra risk and put his investment in the stock market. Since he already has Starbucks’ stock, he decides that this is the logical move for him. However, he also learned that a rational risk investor will always invest in a diversify portfolio. He is thinking about investing in other companies diversify his portfolio. By diversifying his portfolio, he can reduce risk that is inherent of investing in the stock market. As an investment novice who also has a financial constraint, he decides to look at a number of options. He decides to invest in GM, XPO, VZ, and SPY. General Motors (GM) is an American auto manufacture company who employs over 180,000 people in 5 continents3 . GM manufactures 8 different car brands, among them include Chevrolet, Buick, GMC and Cadillac. GM brands themselves as a technological innovator. GM is one of the first to “mass-produce an affordable electric car” and development of a self-drive car. They are also making headways to producing a cleaner car. Recently, however, GM has been in the news for discontinuing several models (mainly sedans) and laying off over 14,000 employees4 . This could however be more of a strategic move than a signal of weak performance. XPO Logistics Inc (XPO) is a logistic company that assists their customers with their supply chain and transportation needs5 . They help many companies with their online market space and makes sure that goods reach the attended customers. They have 1,529 locations in 32 countries and serve 50,000 customers. The continual growth of ecommerce means that XPO’s service will remain relevant and necessary to those companies looking to enter the ecommerce space. Verizon Communication (VZ) is one of the largest telecom service providers. In 2017, Fortune ranked them number 166 . While Verizon is most known for their wireless products it also owns well known subsidies such as Yahoo and AOL, and has recently created a new subsidiary called Oath a media platform provider7 . Verizon also recently launched Verizon 5G Network, a faster internet, in selected cities8 . They plan to extend coverage to the rest of the nation in 2019. They will be the first company to provide 5G services to the public. Starbucks (SBUX) opened in 1971 in Seattle as a local coffee shop9 . Since than it has grown to over 24,000 stores in 75 different countries. Starbucks have over 30 coffee blends using highquality beans from Latin America, Africa, and Asia. Besides coffee, Starbucks also sells tea, fresh food, and other merchandise. Starbucks is known as one of the “World’s Most Valuable Brand” according to Forbes as well as “Best Employer.” Daniel believes in investing in what he knows. He owns a Chevy truck and is a Verizon customer. Furthermore, he recently became aware of XPO logistics and their importance in the online market space. Though he has financial constraints and want to receive the most out of his diversification benefit, he also decides to invest in SPY. SPY is the ticker symbol for SPDR S&P 500 ETF Trust. The SPY is an ETF that follows the S&P 500 Index. The S&P 500 is a marketvalue index that holds 500 of the largest companies that is listed in the NYSE or Nasdaq exchange. ETFs are similar to mutual funds that can be traded in exchanges. Daniel believes since he has financial constraint, holding SPY is a good way to diversify. He comes to you, an MBA student for help on quantifying his risk and return. Daniel wants to know the risk profiles of the different companies. Furthermore, he wants to know if the newly constructed portfolio provides the necessary expected return to compensate for his risk. Assignment: Provide a quick rundown of Daniel’s situation. Discuss strategies and goals of how he can “add value”. Think about issues such as efficiency, risk-return, and how to add value. Include a recommendation of a portfolio make-up (weights, or even suggestions of other stocks). 1. Estimate and compare the risk and return of each stock and the SPY. Give the monthly and annual return for each stock (use videos to annualize monthly return). Which stock appears to be riskiest? How might the expected return of each stock relate to its riskiness? 2. If the portfolio was equally weighted (20% in all stocks and ETF) what is the resulting portfolio position (risk and return)? How does the variability of each stock affect the portfolio? How does this relate to your answer in question 1 above? How would the portfolio risk and return change if 50% of it is in SBUX, 20% in SPY, and 10% in each of the remainder securities. What is the correlation matrix between stocks? How does correlation play a part of portfolio construction? 3. Compute the “beta” for each stock. What does beta measure? (Use SPY as the measurement of the Market). How does the beta rank for each stock? How does this relate to your previous answers? What is the portfolio beta (for the equally weighed)? What does it indicate? 4. What is the required rate of return for each stock (CAPM)? What is the CAPM for the (equally weighed) portfolio? Explain the number and put it into context? (Use the average Risk-Free rate given below). 5. In what stock(s) (if any) should Daniel invest in? Make a recommendation of what you would do if you were Daniel. Do you have a different portfolio construction you would recommend? Why? Would you try something different? Write this report in sections, make sure each section has a heading. The first section: Introduction/Summary Section 2: Risk and Return of each individual stock (Q. 1). Section 3: portfolio risk and return (Q. 2). Section 4: Market risk (Q. 3). Section 5: Expected Return (Q. 4). And finally, Section 6: Conclusion/Recommendation (Q. 5). Table 1: Monthly Returns for Daniel’s Portfolio and risk-free rate DATE SPY SBUX GM VZ XPO RF 1/1/2017 1.79% -0.54% 5.08% -8.19% 3.66% 0.51% 2/1/2017 3.93% 2.99% 0.63% 1.27% 13.97% 0.52% 3/1/2017 -0.31% 2.67% -4.02% -1.77% -6.08% 0.74% 4/1/2017 0.99% 2.86% -2.04% -5.83% 3.13% 0.80% 5/1/2017 1.41% 5.91% -2.05% 1.59% 6.50% 0.89% 6/1/2017 0.15% -8.33% 2.95% -4.25% 22.87% 0.98% 7/1/2017 2.06% -7.43% 3.01% 8.37% -6.99% 1.07% 8/1/2017 0.29% 1.63% 1.56% -0.89% 1.81% 1.01% 9/1/2017 1.51% -2.10% 10.51% 3.17% 10.75% 1.03% 10/1/2017 2.36% 2.10% 6.44% -3.27% 2.32% 1.07% 11/1/2017 3.06% 5.43% 0.26% 6.31% 13.96% 1.23% 12/1/2017 0.70% -0.67% -4.87% 4.01% 15.89% 1.32% 1/1/2018 5.64% -1.08% 3.46% 2.15% 3.11% 1.41% 2/1/2018 -3.64% 0.51% -7.22% -11.71% 4.22% 1.57% 3/1/2018 -3.13% 1.38% -7.65% 0.17% 3.43% 1.70% 4/1/2018 0.52% -0.55% 1.10% 3.20% -4.57% 1.76% 5/1/2018 2.43% -1.56% 16.22% -3.40% 8.33% 1.86% 6/1/2018 0.13% -13.80% -7.73% 5.54% -4.82% 1.90% 7/1/2018 3.70% 7.25% -3.78% 2.64% -0.46% 1.96% 8/1/2018 3.19% 2.02% -4.91% 5.29% 6.80% 2.03% 9/1/2018 0.14% 6.34% -6.60% -1.80% 7.20% 2.13% 10/1/2018 -6.91% 2.52% 8.67% 6.93% -21.71% 2.25% 11/1/2018 1.85% 14.50% 3.72% 5.62% -15.13% 2.33% 12/1/2018 -9.33% -3.48% -11.86% -6.77% -24.81% 2.37% 1/1/2019 8.01% 5.81% 16.65% -2.06% 6.56% 2.37% 2/1/2019 3.24% 3.11% 1.18% 3.38% -17.16% 2.39% 3/1/2019 1.36% 5.81% -6.03% 3.88% 6.73% 2.40% 4/1/2019 4.09% 4.49% 4.99% -3.28% 26.68% 2.38% 5/1/2019 -6.38% -2.09% -14.40% -4.97% -23.49% 2.35% 6/1/2019 6.44% 10.22% 15.57% 5.12% 10.98% 2.17% 7/1/2019 1.51% 12.95% 4.70% -3.26% 16.73% 2.10% 8/1/2019 -1.67% 1.97% -8.06% 5.23% 5.01% 1.95% 9/1/2019 1.48% -8.43% 1.05% 3.78% 1.00% 1.89% 10/1/2019 2.21% -4.37% -0.85% 0.18% 6.75% 1.65% 11/1/2019 3.62% 1.03% -3.12% -0.38% 8.23% 1.54% 12/1/2019 2.40% 2.91% 1.67% 1.93% -3.62% 1.54% 1/1/2020 -0.04% -3.51% -8.77% -3.19% 11.57% 1.52% 2/1/2020 -7.92% -7.54% -8.66% -8.88% -16.81% 1.52% 3/1/2020 -13.00% -16.18% -31.87% -0.79% -34.09% 0.29% 4/1/2020 12.70% 16.72% 7.27% 6.92% 36.90% 0.14% 5/1/2020 4.76% 1.64% 16.11% -0.12% 18.09% 0.13% 6/1/2020 1.33% -5.64% -2.24% -3.92% -1.98% 0.16% 7/1/2020 5.89% 4.00% -1.62% 4.26% -2.89% 0.13% 8/1/2020 6.98% 10.38% 19.04% 3.11% 17.66% 0.10% 9/1/2020 -4.13% 1.72% -0.13% 0.37% -4.09% 0.11% 10/1/2020 -2.49% 1.21% 16.69% -4.20% 6.31% 0.10% 11/1/2020 10.88% 12.72% 26.96% 6.00% 18.53% 0.09% 12/1/2020 3.26% 9.14% -5.02% -2.75% 11.74% 0.09% 1/1/2021 -1.02% -9.51% 21.71% -6.81% -7.37% 0.08% 2/1/2021 2.78% 11.59% 1.28% 1.00% 5.61% 0.04% 3/1/2021 4.20% 1.15% 11.94% 5.15% 5.75% 0.03% 4/1/2021 5.29% 4.78% -0.42% -0.62% 12.83% 0.02% 5/1/2021 0.66% -0.53% 3.65% -2.25% 5.61% 0.02% 6/1/2021 1.91% -1.82% -0.24% -0.81% -4.79% 0.04% 7/1/2021 2.44% 8.60% -3.94% -0.45% -0.86% 0.05% 8/1/2021 2.98% -3.24% -13.78% -1.40% 7.66% 0.05% 9/1/2021 -4.97% -6.11% 7.55% -1.80% -8.43% 0.04% 10/1/2021 7.02% -3.84% 3.26% -1.89% 7.82% 0.05% 11/1/2021 -0.80% 3.37% 6.32% -5.13% -15.57% 0.05% 12/1/2021 4.26% 6.69% 1.31% 3.36% 6.89% 0.06% Data Source: Yahoo Finance10; Federal Reserve Bank of St Louis11 References 1. "About Bean Tock." Bean Stock. Accessed January 05, 2019. https://starbucksbeanstock.com/en-us/about-bean-stock-en-us/. 2. "The Program That Turned Employees Into Partners Continues to Change Lives." Starbucks Newsroom. March 26, 2014. Accessed January 05, 2019. https://news.starbucks.com/news/beanstock-a-program-that-turned-employees-into-partners-continues-to-chang. 3. "About GM." About General Motors | GM.com. Accessed January 05, 2019. https://www.gm.com/our-company/about-gm.html. 4. Denning, Stephanie. "Why The General Motors Layoffs Were Strategic." Forbes. November 29, 2018. Accessed January 05, 2019. https://www.forbes.com/sites/stephaniedenning/2018/11/29/why-the-general-motors-layoffswere-strategic/#635dfaca5d5e. 5. "OUR COMPANY." XPO Logistics. Accessed January 05, 2019. https://www.xpo.com/aboutus/our-company. 6. "Who We Are." About Verizon. September 09, 2018. Accessed January 05, 2019. https://www.verizon.com/about/our-company/who-we-are. 7. "Building Brands People Love." About Verizon. July 12, 2018. Accessed January 05, 2019. https://www.verizon.com/about/our-company/video-advertising. 8. "What Is 5G?" About Verizon. December 27, 2018. Accessed January 05, 2019. https://www.verizon.com/about/our-company/5g/what-5g. 9. "Starbucks Company Profile." Starbucks Coffee Company. Accessed January 05, 2019. https://www.starbucks.com/about-us/company-information/starbucks-company-profile. 10. "3-Month Treasury Bill: Secondary Market Rate." FRED. January 02, 2019. Accessed January 06, 2019. https://fred.stlouisfed.org/series/TB3MS. 11. "Yahoo Finance - Business Finance, Stock Market, Quotes, News." Yahoo! Finance. Accessed January 06, 2019. https://finance.yahoo.com/.