Franklin University MBA737 Equity Analyst Project Franklin University MBA 737 Equity Analyst Project The Equity Analyst Project involves a total of three assignments: 1. Individual Asset Allocation Exercise 2. Team Analysis of Select Industry Groups Team Analysis of Companies within an Industry Group The intent of the project is to simulate a top-down, three-stage approach to security analysis that proceeds with, first, an analysis of general economic factors, then industry comparisons, and finally the analysis of individual companies within a particular industry. Here is justification for this approach: The results of several academic studies have supported this technique. First, studies indicated that most changes in an individual firms earnings could be attributed to changes in aggregate corporate earnings and changes in the firms industry, with the aggregate earnings changes being more important Second, studies [have] found a relationship between aggregate stock prices and various economic series, such as employment, income, or production Third, an analysis of the relationship between rates of return for the aggregate stock market, alternative industries, and individual stocks showed that most of the changes in rates of return for individual stocks could be explained by changes in the rates of return for the aggregate stock market and the stocks industry.[1] The following is provided as a guide to your analysis in these three assignments: Individual Asset Allocation Exercise This exercise involves an analysis of general economic conditions or systematic risk, i.e., the risk that affects all industries and companies, in the U.S. economy. You are asked to determine in percentage terms an optimal allocation of $1,000,000 among the following three asset classes: U.S. equities, U.S. Treasury bonds, and cash. The goal is to maximize your expected return over the next 12 months. You are asked to write a 1-2 page paper providing your analysis of the asset classes return prospects and your justification of your allocation of monies among them. First, consider historical returns on various asset classes in the U.S. Look at Figure 10.4 on p. 305 of your textbook. Also, in Table 10.2 on p. 312 you can see that historically equities outperform bonds in terms of average return but they also carry more risk as defined by their standard deviations. These historical results show that on average the return on equities is highest but in some specific years this may not be true. For example, look at Table 10.1 on pp.308-309 and you can see that in three out of the five years from 2000 to 2004 the annual return on large-company stocks (defined in the text as the S&P 500)[2] was negative. In this exercise your investment horizon is one year. In considering your allocation among U.S. equities, long-term Treasury bonds, and cash to maximize your prospective return over the next twelve months, we might next more precisely define these asset classes. We can define U.S. equities as the Standard and Poors (S&P) composite index [At present includes 500 of the largest (in terms of market value) stocks in the United States. (p.304)]. More detailed information is available directly from Standard & Poors:http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,0,0,0,0,0,0,0.html Excel spreadsheets of Index returns dating from 2009 back to the late 1980s are available at http://www2.standardandpoors.com/spf/xls/index/MONTHLY.xls. Web-based finance sites also customarily carry data on the S&P 500. For example, at Yahoo! Finance:http://finance.yahoo.com/q?s=%5EGSPC at CNNMoney.com:http://money.cnn.com/data/markets/sandp/? At MSN: http://moneycentral.msn.com/detail/stock_quote?Symbol=$INX We can define long-term Treasury bonds as 30-year U.S. government bonds. Historical data on yields on debt claims are available from the Federal Reserve at http://www.federalreserve.gov/releases/h15/data.htm. F…
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