Question

543 em 13.1 Assessing the Stalchecks's Portfolio Performance G4 Mary and Nick Stalcheck have an investment portfolio containing four investments. It was developed to provide them with a balance berween current income and capital appreciation. Rather than acquire mutual fund shares or diversify within a given dass of investments, they developed their portfolio with the idea of diversifying across various asset classes. The portfolio currently contains common stock, industrial bonds, mutual fund shares, and options. They acquired each of these investments during the past three years, and they plan to purcha investments sometime in the future. Currently, the Stalchecks are interested in measuring the return on their investment and assessing how well they have done relative to the market. They hope that the return earned over the past calendar year is in excess of what they would have earned by investing in a portfolio consisting of the S&P 500 Stock Composite Index. Their research has indicated that the risk free rate was 7.2% and that the (before-tax) return on the S&P 500 portfolio was 10.1% during the past year. With the aid of a friend, they have been able to estimate the beta of their portfolio, which was 1.20. In their analysis, they have planned to ignore taxes because they feel their earnings have been adequately sheltered. Because they did not make any portfolio transac tions during the past year, all of the Stakhecks investments have been held more than 12 months, and they would have to consider only unrealized capital gains, if any, To make the necessary calculations, the Stakchecks have gathered the following information on each invest ment in their portfolio. Common stock. They own 400 shares of kJ Enterprises common stock. Kl is a diversified manufacturer of metal pipe and is known for its unbroken stream of dividends. Over the past few years. It has entered new markets and, as a result, has offered moderate capital appreciation potential. Its share price has risen from $17.25 at the start of the last calendar year to $18.75 at the end of the year. During the year, quarterly cash dividends of $0.20 0.20 $0.25, and S0.25 were paid. Industrial bowl The Stalchecks own eight Cal Industries bonds. The bonds have a $1.000 par value, have a 250 coupon, and are due in 2027. They are Aerated by Moody's. The bonds were quoted 97.000 at the beginning of the year and ended the calendar year at 96.375% Mutual fund. The Stakchecks hold 500 shares in the Holt Fund, a balanced, no-load mutual fund. The dividend distribution on the fund during the ver consisted of 0.60 in investitient income and 50.50 in capital . The fund NAV at the beginning of the calendar year was $19.45, and it ended the year at $20.02 Options The Stakhecks on prions contracts on the stock of a company they follow The value of the contracts to the h ing the calendar and the total value of the options W .19000 1. Calculate the hold nedem o Amhat the Stalchecke n eral and sta nd that the s L ola urte for each of the four investments ing o mbine ted p itals on didels det ta HPK for ha K lets

Answer 1

Part(a) Part (0) Weight of security at the beginning of the year relative to total portfolio Common stock = [(18.75 - 17.25) + 0.20+0.20+0.25+25] / 17.25=13.91% Industrial bonds = [(1000*96.375%-970) +1,000*9.25%]/970=8.89% Mutual fund = [(20.02-19.45) +0.60+0.50J/19.45 = 8.59% Options= (29000-26000)/26000=11.54% Portfolio value, beginning = 6,900+7,760+9,725+26,000 = 50.385: Common stock = 400*17.25 = 6,900 => 6,900/50,385 = 13.69% Industrial bonds = 97%*1000*8 = 7.760 => 7,760/50,385 = 15.40%; Mutual funds = 500*19.45 = 9,725 => 9,725/50,385 = 19.30%Options = 26,000 => 26,000/50,385 = 51.60% Part (b) Common stock = [(18.75-17.25) *(1-15%) + (-20+20+25+25) *(1- 15%)/17.25 = 11.83% HPR = 13.91%*13.69%+8.89%*15.40%+8.59%*19.30%+11.54%*51.60% = 12.79% Industrial bonds = [(1000*96.375%-970) *(1-15%) + (1,000*9.25%) *(1- 35%)/970 = 5.65% Current income return = 360+740+300 = 1400/50,385 = 2.78%; Common stock = (0.20+0.20+0.25+0.25) 400 = 360 Mutual fund = [(20.02-19.45) *(1-15%) +0.60*(1-35%) +0.50*(1- 15%)]/19.45 = 6.68% Industrial bonds = 1000*9.25%*8 = 740; Mutual fund = 0.60*500 = 300 Options= (29000-26000) * (1-15%)/26000 = 9.81% Options = 0; Capital gains return = (600-50+285+3,000)/50,385 = 3,835/50,385 = 7.61% Part (d) Common stock = (18.75-17.25)*400 = 600; Industrial bonds = [(1000*96.375%-970)*8 = -50 Jensen's measure = 12.79% - 7.2% - [1.20x(10.1%-7.2%)] = 9.07% From the above alpha, the Stalcheck portfolio has been over performing the market. However, I believe that it is reasonable to use this measure to evaluate the portfolio as it is the investment vehicles comprising the portfolio were chosen with the goal of getting a better return than the market. Mutual fund = [(20.02-19.45)*500=285; Options = 3,000 The capital gains forms a higher portion of the total holding period returns of the portfolio. Part (e) Since their portfolio has been outperforming the market I believe that they can continue with their current investments.