Investment Analysis

Portfolio Project
5/4/2009 RAHUL RAI

Table of contents

Executive Summary.. 3 Goals & objective 5 Weekly portfolio results. 7 Portfolio beta estimation 21 Individual securities analysis 23 o General Electric Corp.. 23 o McDonalds Corp. 32 o Vanguard Short term bond index fund. 41 o Family Dollar Stores Inc 46 Summary.. 53 Conclusion.. 60 Appendix-1.. 61 Appendix-2.. 64 Appendix-3. 66

Executive Summary This project reflects our assigned role as investment analyst or portfolio manager. We invested maximum $250,000 in at least one stock, one mutual fund, one corporate bond, one treasury security and one stock option for the short period of 14 weeks starting from Jan 30, 2009 to May 1, 2009. Being an investment analyst, we successfully managed portfolio by updating it every week by selecting securities on basis of our investment objective. Investment in different securities
$100,000 $80,000 $60,000 $40,000 $20,000 $Stocks Mutual Funds Corportate bonds T-bills Cash Week-1 Week-14

We chose our investment objective is to preserve the capital. So, goal to be attained according to our objective was to preserve our capital in that bear market rather than to lose along with market. Thus, we learnt to select securities to invest in for the portfolio on the basis of their betathe risk measure and understood the concept and importance of portfolio beta to fulfill investment objective. Further, we have demonstrated weekly results of our portfolio with sufficient details. It shows how far we reached to attain our investment goals.

Week-1 Week-14 250,000 $ 242,319 Total Portfolio value $ NYSE Composite 5195.79 5,568.76 value

Overall return on investment -3.07% 7.18%

12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% -10.00% Portfolio return % NYSE Composite index return % 1 2 3 4 5 6 7 8 9 10 11 12 13

Above chart supports our investment objective. We have successfully managed to preserve our capital over extremely volatile course of the market. Lower portfolio beta of approx. 0.29 makes portfolio returns very less sensitive with market returns over the same time period. Later in this project, we discussed the news and market/ industry information that affected the performance of the individual securities in our portfolio. We analyzed stock performance and ratings, debt structure, competitive environment, current economic situation, impacts of globalization and options & preferred stocks (if any). In the conclusion, we summarized everything that we learned in the context of portfolio formation and market efficiency, diversification, appropriate choice of securities for investment objective, CAPM, option profit diagrams and trading strategies.

Statement of objective Introduction Investment objective changes for most of the people throughout their life. It is all dependent on the risk and return factor and individuals willingness to take risk or in other words people need to be compensated with proper return against the value of the risk they take, and this is termed as risk aversion. Capital appreciation may be more important for the young investors as they are more willing to take risk but later stage when one enters the golden years of their life they became more risk aversive and would move with placing more importance on gaining income and preserving it. Risk is often defined as portfolio volatility, or the fluctuation in the value of your assets over time. Understanding ones tolerance for risk which differs for each investor is the key to choose an investment strategy. But the most successful investment should be well diversified. Moreover a well diversified portfolio can not only help to reduce unwanted risk but also contribute to winning the portfolio.1

Goals and Objective From the very beginning we were well defined to choose our objective of the portfolio. We were decided to move with the objective of preserving the capital. The reason behind this was the time period in which we were given this project. Presently the economy is facing recession, thus moving with the objective of preserving the capital was a wise decision. As its hard to beat the market or maximize the current cash flow in such economy. Moreover, in order to preserve our capital we have invested in such stocks like family dollar and Wal-Mart which opt to move better compared to other fields even in such economy. In addition we have preserved ample of cash and invested in the Treasury bill which are risk free. The beta of the stocks that we have invested in is low. The companies with lower beta tend to do better in such period of recession. We started with selecting the stocks of the companies that had relatively low beta like GE, Wal-Mart and Family dollar. Thus, we understood the importance of portfolio beta in preserving our objective. We have even preserved ample of cash on hand which is a plus sign in preserving our capital.
1

www.investopedia.com

Moreover, investing in the bonds and mutual funds will help us to gain long term returns and give a steady cash flow over the time. Mutual funds offer diversification, convenience and high liquidity. Our portfolio beta ended up with 0.2926 that is approx of 0.30. The market beta is 1. Thus if the return on the market portfolio changes by 1%, then our portfolio return will change by 0.2926%. Thus a low beta indicated good sign of investment in the recessionary economy.

1.2 1 0.8

BETA

0.6 0.4 0.2 0 Security beta Market beta

We started our portfolio with a cash of $ 250,000 and by the end of the 14th week we had it about $ 242,320 which shows we made a loss of $ 7680. We were able to maintain the rest of our capital during this 14 week project. Thus the loss which we incurred in the project was because of the beta of the market that moved opposite to our assumption. The beta of our portfolio is moving quite consistently but the market beta is too volatile. That is the reason our portfolio shows this negligible amount of loss. Thus during our project we tried buying and selling few stock, exercised our option and tried using our cash on hand in more productive way thereby sticking to our objective of preserving the capital. 2

Security and Portfolio Analysis, Douglas and Janis.

Weekly portfolio results

Week-1 January 30, 2009 Trading place

Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JP Morgan & Chase Co. Mutual Funds Legg Mason Opportunity Primary T. Rowe Price Growth Stock Corporate Bonds General Electric Pfizer T- Bills 13 weeks 26 weeks Options Rio Tinto PLC

CUSIP/ Ticker

Quantity

Price $

Total Value $

JNJ WMT MCD FDO JPM

NYSE NYSE NYSE NYSE NYSE

300 300 300 250 400

57.69 47.12 58.02 27.77 25.51

17,307 14,136 17,406 6,943 10,204

LMOPX PRGFX

NYSE NYSE

1,000 500

4.82 18.83

4,820 9,415

36962G3H5 717081AR4

NYSE NYSE

15 15

978.05 1,085.47

14,671 16,282

912795L66 912795Q95

2 2

9,996.18 9,982.34

19,992 19,965

RJTDC.X Expire- 17 April, 2009 Strike- 115.00 CALL

NYSE

200

JP Morgan Chase

JSAOS.X Expire- 20 March, 2009 Strike- 22.50 PUT

NYSE

400

Total Cash in hands Total Portfolio value NYSE Composite value

$ $ $

151,140 98,860 250,000 5,195.79

Week 1-2 January 30- February 6, 2009 Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JP Morgan & Chase Co. Mutual Funds Legg Mason Opportunity Primary T. Rowe Price Growth Stock Corporate Bonds General Electric Pfizer T- Bills 13 weeks 26 weeks Options Rio Tinto PLC RJTDC.X Expire- 17 April, 2009 Strike- 115.00 CALL JP Morgan Chase JSAOS.X Expire- 20 March, 2009 Strike- 22.50 PUT Total Cash in hands Total portfolio value 1- week portfolio return NYSE Composite value 1- week NYSE Composite return 5,195.79 Jan 30, 2009 $ $ $ 151,140 98,860 250,000 Feb 6, 2009 $ $ $ 153,188 98,8984 252,086 0.8344% 5,475.28 5.3792% 400 200 912795L66 912795Q95 2 2 9,996.183 9,982.34 19,992 19,965 9,993.70 9,980.93 19,987 19,962 36962G3H5 717081AR4 15 15 978.05 1,085.47 14,671 16,282 961.63 1,062.14 14,425 15,932 LMOPX PRGFX 1,000 500 4.82 18.83 4,820 9,415 5.09 20.06 5,090 10,030 JNJ WMT MCD FDO JPM 300 300 300 250 400 57.69 47.12 58.02 27.77 25.51 17,307 14,136 17,406 6,943 10,204 58.51 49.63 58.46 26.92 27.63 17,553 14,889 17,538 6,730 11,052 CUSIP/ Ticker Quantity Price $ Total Value $ Price $2 Total Value $3

3 4

T-bill price calculation is shown in Appendix-2 For cash in portfolio, BCLR (Brokers cash loan rate) is used to find its FV. Calculation is shown in Appendix-2

Week 2-3 February 6- February 13, 2009 Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JP Morgan & Chase Co. Mutual Funds Legg Mason Opportunity Primary T. Rowe Price Growth Stock Corporate Bonds General Electric Pfizer T- Bills 13 weeks 26 weeks Options Rio Tinto PLC RJTDC.X Expire- 17 April, 2009 Strike- 115.00 CALL JP Morgan Chase JSAOS.X Expire- 20 March, 2009 Strike- 22.50 PUT Total Cash in hands Total portfolio value 1- week portfolio return NYSE Composite value 1- week NYSE Composite return 5,475.28 Feb 6, 2009 $ $ $ 153,188 98,898 252,086 Feb 13, 2009 $ $ $ 153,518 95,7435 249,261 -1.1208% 5,206.76 -4.9042% 400 1.73 692 200 12.5 2,500 912795L66 912795Q95 2 2 9,993.70 9,980.93 19,987 19,962 9,993.50 9,977.80 19,987 19,956 36962G3H5 717081AR4 15 15 961.63 1,062.14 14,425 15,932 974.74 1,103.10 14,621 16,547 LMOPX PRGFX 1,000 500 5.09 20.06 5,090 10,030 4.79 19.53 4,790 9,765 JNJ WMT MCD FDO JPM 300 300 300 250 400 58.51 49.63 58.46 26.92 27.63 17,553 14,889 17,538 6,730 11,052 57.1 46.53 56.81 26.61 24.69 17,130 13,959 17,043 6,653 9,876 CUSIP/ Ticker Quantity Price $ Total Value $ Price $2 Total Value $3

Adjusted by adding options RJTDC.X & JSAOS.X to portfolio

Week 3-4 February 13- February 20, 2009 Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JP Morgan & Chase Co. Mutual Funds Legg Mason Opportunity Primary T. Rowe Price Growth Stock Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options Rio Tinto PLC RJTDC.X Expire- 17 April, 2009 Strike- 115.00 CALL JP Morgan Chase JSAOS.X Expire- 20 March, 2009 Strike- 22.50 PUT Total Cash in hands Total Portfolio value 1- week portfolio return NYSE Composite value 1- Week NYSE composite return 5,206.76 Feb 13, 2009 $ $ $ 153,518 95,743 249,261 Feb 20, 2009 $ $ 80,8847 $ 165,149 400 1.73 692 5.4 2,160 200 12.5 2,500 9.6 1,920 912795L66 912795Q95 912810QA9 2 2 15 9,993.50 9,977.80 19,987 19,956 9,994.67 9,978.18 992.65 19,989 19,956 14,890 36962G3H5 717081AR4 15 15 974.74 1,103.10 14,621 16,547 969.846 1062.62 14,548 15,939 LMOPX PRGFX 1,000 500 4.79 19.53 4,790 9,765 3.99 18.54 3,990 9,270 JNJ WMT MCD FDO JPM 300 300 300 250 400 57.1 46.53 56.81 26.61 24.69 17,130 13,959 17,043 6,653 9,876 54.65 50.02 54.57 27.02 19.9 16,395 15,006 16,371 6,755 7,960 CUSIP/ Ticker Quantity Price $ Total Value $ Price Total Value $2

246,033 -1.2947% 4,804.51 -7.7255%

6 7

Bond price calculation shown in Appendix-2

Adjusted by buying 30 year treasury bonds

10

Week 4-5 February 20- February 27, 2009 Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JP Morgan & Chase Co. Mutual Funds Legg Mason Opportunity Primary T. Rowe Price Growth Stock Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options Rio Tinto PLC 912795L66 912795Q95 912810QA9 RJTDC.X Expire- 17 April, 2009 Strike- 115.00 CALL JP Morgan Chase JSAOS.X Expire- 20 March, 2009 Strike- 22.50 PUT Total Cash in hands Total Portfolio value 1- week portfolio return NYSE Composite value 1- Week NYSE composite return 4,804.51 Feb 20, 2009 $ $ $ 165,149 80,884 246,033 Feb 27, 2009 $ $ $ 160,618 80,915 241,533 -1.8291% 4,617.03 -3.9022% 400 5.4 2,160 1.98 792 2 2 15 200 9,994.67 9,978.18 992.65 9.6 19,989 19,956 14,890 1,920 9,997.50 9,979 $ 992.70 7.3 19,995 19,958 14,891 1,460 36962G3H5 717081AR4 15 15 969.84 1062.62 14,548 15,939 887.9 1,065.47 13,319 15,982 LMOPX PRGFX 1,000 500 3.99 18.54 3,990 9,270 3.9 17.75 3,900 8,875 JNJ WMT MCD FDO JPM 300 300 300 250 400 54.65 50.02 54.57 27.02 19.9 16,395 15,006 16,371 6,755 7,960 50 49.24 52.25 27.44 22.85 15,000 14,772 15,675 6,860 9,140 CUSIP/ Ticker Quantity Price $ Total Value $ Price Total Value $2

11

Week 5-6 February 27- March 6, 2009 Investments CUSIP/ Ticker Quantity Price $ Total Value Price Total Value2

Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JP Morgan & Chase Co. Mutual Funds Legg Mason Opportunity Primary T. Rowe Price Growth Stock Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options Rio Tinto PLC RJTDC.X Expire- 17 April, 2009 Strike- 115.00 CALL JP Morgan Chase JSAOS.X Expire- 20 March, 2009 Strike- 22.50 PUT Total Cash in hands Total portfolio value 1- week portfolio return NYSE Composite value 1- week NYSE composite return 4,617.03 Feb 27, 2009 $ $ $ 160,618 80,915 241,533 March 6, 2009 $ $ $ 157,669 80,946 238,615 -1.2080% 4,284.49 -7.2025% 400 1.98 792 8.25 3,300 200 7.3 1,460 6.4 1,280 912795L66 912795Q95 912810QA9 2 2 15 9,997.50 9,979 $ 992.70 19,995 19,958 14,891 9,995.64 9,982.03 994.6 19,991 19,964 14,919 36962G3H5 717081AR4 15 15 887.9 1,065.47 13,319 15,982 797.54 1,048.31 11,963 15,725 LMOPX PRGFX 1,000 500 3.9 17.75 3,900 8,875 3.37 16.99 3,370 8,495 JNJ WMT MCD FDO JPM 300 300 300 250 400 50 49.24 52.25 27.44 22.85 15,000 14,772 15,675 6,860 9,140 47.97 48.91 52.12 30.36 15.93 14,391 14,673 15,636 7,590 6,372

12

Week 6-7 March 6- March 13, 2009 Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JP Morgan & Chase Co. Genentech Inc. General Mills Inc. Mutual Funds Legg Mason Opportunity Primary T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options Rio Tinto PLC RJTDC.X Expire- 17 April, 2009 Strike- 115.00 CALL JSAOS.X Expire- 20 March, 2009 Strike- 22.50 PUT McDonald's MCDOJ.X ExpireMarch 20, 2009 Strike- 50.00 BOUGHT PUT Total Cash in hands Total Portfolio value 1- week portfolio return NYSE Composite Return 1- week NYSE Composite return
8

CUSIP/ Ticker

Quantity

Price $ March 6, 2009

Total Value

Price March 13, 2009

Total Value2

JNJ WMT MCD FDO JPM DNA GIS

300 300 300 250 400 125 200

47.97 48.91 52.12 30.36 15.93

14,391 14,673 15,636 7,590 6,372 -

50.64 49.19 52.38 31.52 94.2 52.6

15,192 14,757 15,714 7,880 11,775 10,520 -

LMOPX PRGFX VBISX 36962G3H5 717081AR4

1,000 500 1,000 15 15

3.37 16.99

3,370 8,495 -

18.34 10.18 898.125 1,037.68

9,170 10,180 13,472 15,565 19,994 19,968 14,545 75

797.54 1,048.31

11,963 15,725 19,991 19,964 14,919 -

912795L66 912795Q95 912810QA9

2 2 15

9,995.64 9,982.03 994.6

9,997.17 9,983.78 969.69

200

6.4

1,280 -

JP Morgan Chase

400

8.25

3,300

300

0.25

$ $ $

157,669 80,946 238,615 4,284.49

$ $ $

178,807 63,017 8 241,824 1.3450% 4,721 10.1881%

Adjusted by proceeds from sale of 400 shares of JPM @ $23.75 (Subtracting call premium of $400), 200 call options of RTP @ $6.8, 1000 mutual fund shares of LMOPX @ $4.11 & further investing in GIS, DNA, VBISX & MCDOJ.X

13

Week 7-8 March 13- March 20, 2009

Investments CUSIP/ Ticker Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JNJ WMT MCD FDO 300 300 300 250 Quantity Price March 13 50.64 49.19 52.38 31.52 15,192 14,757 15,714 7,880 Total Value Price2 March 20 51.67 49.59 53.2 30.86 15,501 14,877 15,960 7,715 Total Value3

Genentech Inc. General Mills Inc. Mutual Funds

DNA GIS

125 200

94.2 52.6

11,775 10,520 -

93.72 47.22

11,715 9,444

T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options McDonald's

PRGFX VBISX

500 1000

18.34 10.18

9,170 10,180 -

18.57 10.24

9,285 10,240

36962G3H5 717081AR4

15 15

898.125 1,037.68

13,472 15,565 -

916.082 1,054.11

13,741 15,812

912795L66 912795Q95 912810QA9

2 2 15

9,997.17 9,983.78 969.69

19,994 19,968 14,545 75

9,997.57 9,985 975.62

19,995 19,970 14,634

MCDOJ.X ExpireMarch 20, 2009 Strike- 50.00 BOUGHT PUT

300

0.25

0.05 15

Total Cash in hands Total Portfolio value 1- week portfolio return NYSE Composite value 1- week NYSE composite return

178,807 63,017 241,824

178,904 63,041 241,946 0.0501%

4,721

4,832.13 2.3540%

14

Week 8-9 March 20- March 27, 2009 Investments CUSIP/ Ticker Quantity Price March 20 JNJ WMT MCD FDO DNA GIS 300 300 300 250 125 200 51.67 49.59 53.2 30.86 93.72 47.22 15,501 14,877 15,960 7,715 11,715 9,444 T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options McDonald's MCDOJ.X ExpireMay 15, 2009 Strike50.00 BOUGHT PUT Total Cash in hands Total Market value of portfolio 1 week portfolio return NYSE Composite value 1 week NYSE composite return 4,832.13 300 0.05 15 0.4 120 912795L66 912795Q95 912810QA9 2 2 15 9,997.57 9,985 975.62 19,995 19,970 14,634 9998.62 9986.665 982.91 19,997 19,973 14,744 36962G3H5 717081AR4 15 15 916.082 1,054.11 13,741 15,812 909.014 1053.89 13,635 15,808 PRGFX VBISX 500 1000 18.57 10.24 9,285 10,240 19.9 10.23 9,950 10,230 50.85 10,170 Total Value Price2 March 27 52.83 52.57 55.01 33.63 15,849 15,771 16,503 8,408 Total Value3

Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores Genentech Inc. General Mills Inc. Mutual Funds

$ $ $

178,904 63,041 241,945

$ $ $

171,158 74,780 9 245,939 1.6505% 5,096.64 5.4740%

Adjusted by proceeds of 125 shares of DNA @ $ 93.72

15

Week 9-10 March 27- April 3, 2009 Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores General Mills Inc. Mutual Funds T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options McDonald's PRGFX VBISX 36962G3H5 717081AR4 500 1000 15 15 19.9 10.23 909.014 1053.89 $ $ $ $ 9,950 10,230 13,635 15,808 19.99 10.24 879.04 1046.8 $ $ $ $ 9,995 10,240 13,186 15,702 CUSIP/ Ticker Quantity Price March 27 52.83 52.57 55.01 33.63 50.85 Total Value Price2 April 3 52.15 53.8 56.64 31.9 50.86 Total Value3

JNJ WMT MCD FDO GIS

300 500 500 250 200

$ $ $ $ $

15,849 15,771 16,503 8,408 10,170

$ $ $ $ $

15,645 26,900 28,320 7,975 10,172

912795L66 912795Q95 912810QA9

2 2 15

9998.62 9986.665 982.91

$ $ $

19,997 19,973 14,744

9998.38 9986.41 968.65

$ $ $

19,997 19,973 14,530

MCDOJ.X Expire- May 15, 2009 Strike50.00 BOUGHT PUT Total

500

0.4

120

0.15

75

$ $ $

171,158 74,780 245,938 5096.64

Cash in hands Total market value of portfolio 1 week portfolio return NYSE Composite value NYSE Composite return 1 week

$ 192,709 $ 52,72110 $ 245,430 -0.2068% 5318.75 4.3580%

10

Adjusted by buying 200 additional shares of each WMT & MCD

16

Week 10-11 April 3- April 10, 2009 Investments CUSIP/ Ticker Quantity Price April 3 JNJ WMT MCD FDO GIS 300 500 500 250 200 52.15 53.8 56.64 31.9 50.86 15,645 26,900 28,320 7,975 10,172 Total Value Price2 April 10 51.41 50.66 56.67 34.33 50.84 15,423 25,330 28,335 8,583 10,168 Total Value3

Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores General Mills Inc. Mutual Funds T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options McDonald's 912795L66 912795Q95 912810QA9 2 2 15 36962G3H5 717081AR4 15 15 PRGFX VBISX 500 1000

19.99 10.24 879.04 1046.8

9,995 10,240 13,186 15,702

20.39 10.23 912.08 1071.0531

10,195 10,230 13,681 16,066

9998.38 9986.41 968.65

19,997 19,973 14,530

9998.93 9987.84 960.59

19,998 19,976 14,409

MCDOJ.X Expire- May 15, 2009 Strike- 50.00 BOUGHT PUT

500

0.15

75

0.03

15

Total Cash in hands Total Market value of portfolio 1 week portfolio return NYSE Composite value NYSE Composite return 1 week

$ $ $

192,709 52,721 245,430

$ $ $

192,408 52,741 245,149 -0.1144%

5,319

5,376.44 1.0847%

17

Week 11-12 April 10- April 17, 2009 Investments CUSIP/ Ticker Quantity Price April 10 51.41 50.66 56.67 34.33 50.84 Total Value Price2 April 17 15,423 25,330 28,335 8,583 10,168 53.05 50.2 56.09 32.82 49.89 15,915 25,100 28,045 8,205 9,978 Total Value3

Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores General Mills Inc. Mutual Funds T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options McDonald's 912795L66 912795Q95 912810QA9 2 2 15 36962G3H5 717081AR4 15 15 PRGFX VBISX 500 1000 JNJ WMT MCD FDO GIS 300 500 500 250 200

20.39 10.23

10,195 10,230

20.6 10.28

10,300 10,280

912.08 1071.0531

13,681 16,066

904.62 1065.79

13,569 15,987

9998.93 9987.84 960.59

19,998 19,976 14,409

9999.45 9990.0542 951.77

19,999 19,980 14,277

MCDOJ.X Expire- May 15, 2009 Strike- 50.00 BOUGHT PUT

500

0.03

15

0.05

25

Total Value Cash in hands Total Portfolio value 1 week portfolio return NYSE Composite Value NYSE Composite 1 week return

192,408 52,741 245,149

191,660 52,761 244,421 -0.2969%

5,376.44

5,480.60 1.9373%

18

Week 12-13 April 17- April 24, 2009 Investments CUSIP/ Ticker Quantity Price April 17 53.05 JNJ WMT MCD FDO GIS 300 50.2 Wal-Mart Mc Donald's Family Dollar Stores General Mills Inc. Mutual Funds 20.6 T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds 904.62 General Electric Pfizer T- Bills/ Bonds 9999.45 13 weeks 26 weeks 30 years T- bond Options McDonald's 912795L66 912795Q95 912810QA9 2 9990.0542 2 951.77 15 14,277 939.551 14,093 19,980 9991.425 19,983 19,999 9999.79 20,000 36962G3H5 717081AR4 15 1065.79 15 15,987 1066.42 15,996 13,569 905.3 13,580 PRGFX VBISX 500 10.28 1000 10,280 10.27 10,270 10,300 20.83 10,415 500 56.09 500 32.82 250 49.89 200 9,978 48.73 9,746 8,205 32.79 8,198 28,045 54.31 27,155 25,100 47.87 23,935 15,915 Total Value Price2 April 24 50.92 15,276 Total Value3

Stocks Johnson & Johnson

MCDOJ.X ExpireMay 15, 2009 Strike- 50.00 BOUGHT PUT

500

0.05

25

0.3 150

Total Value Cash in hands Total Portfolio value 1 week portfolio return

$ $ $

191,660 52,761 244,421

$ 188,796 $ 52,781 $ 241,577 -1.1633%

NYSE composite value 1 week NYSE composite return

5,480.60

5,468.41 -0.2224%

19

Week 13-14 April 24- May 1, 2009 Investments CUSIP/ Ticker Quantity Price April 24 JNJ WMT MCD FDO GIS 300 500 500 250 200 50.92 47.87 54.31 32.79 48.73 15,276 23,935 27,155 8,198 9,746 Total Value Price2 May 1 52.59 50.05 52.4 32.14 50.48 15,777 25,025 26,200 8,035 10,096 Total Value3

Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores General Mills Inc. Mutual Funds T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options McDonald's 912795L66 912795Q95 912810QA9 2 2 15 36962G3H5 717081AR4 15 15 PRGFX VBISX 500 1000

20.83 10.27 905.3 1066.42

10,415 10,270 13,580 15,996

21.11 10.28 903.732 1079.57

10,555 10,280 13,556 16,194

9999.79 9991.425 939.551

20,000 19,983 14,093

10,000 9992.366 907.727

20,000 19,985 13,616

MCDOJ.X ExpireMay 15, 2009 Strike- 50.00 BOUGHT PUT

500

0.3

150

0.4

200

Total Value Cash in hands Total portfolio value 1- week portfolio return NYSE Composite Value 1- week NYSE composite return

188,796 52,781 241,577 5,480.60

189,518 52,801 242,319 0.3074% 5,568.76 1.6086%

20

Portfolio Beta estimation As of May 1, 2009

Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores General Mills Inc. Mutual Funds T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds11 General Electric Pfizer T- Bills/ Bonds12 13 weeks 26 weeks 30 years T- bond Options13 McDonald's CUSIP/ Ticker Quantity
Total Value Weight Wi Beta Bi Wi*Bi

JNJ WMT MCD FDO GIS

300 500 500 250 200

15,777 25,025 26,200 8,035 10,096

0.065108 0.103273 0.108121 0.033159 0.041664

0.59 0.23 0.65 0.23 0.27

0.038413792 0.023752682 0.07027897 0.007626486 0.011249257

PRGFX VBISX 36962G3H5 717081AR4

500 1000 15 15

10,555 10,280 13,556 16,194

0.043558 0.042423 0.055943 0.066829

1.01 0.53 1.19 0.118

0.043993686 0.022484318 0.066571641 0.00788582

912795L66 912795Q95 912810QA9

2 2 15

20,000 19,985 13,616

0.082535 0.082474 0.056190

0 0 0

0 0 0

MCDOJ.X Expire- May 15, 2009 Strike- 50.00 BOUGHT PUT

500

200

0.000825

0.4225

0.000348712

Cash

52,801 $ 242,320

0.217898

0 Portfolio Beta= Wi * Bi = 0.2926

Total Portfolio value

1.000000

11 12 13

Bonds beta BD= BL-BU; where BL was found to be from Yahoo! Finance and BU can be calculated using Hamadas equation BL= BU [ 1+ (1-Tax rate) * LTD/ Equity ]

Beta of Government securities and cash are almost zero as they are assumed to be risk free We have assumed beta of a put option as 0.65* respective stocks beta

21

12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% -10.00% Theoratical portfolio return acc. To beta Real portfolio return NYSE Composite index return 1 2 3 4 5 6 7 8 9 10 11 12 13

In above chart, we calculated theoretical return on our portfolio according to its overall beta. That goes well together with real portfolio return that we got. Differences are because of higher volatility of market and securities changes during the period that we did not consider counting real return on portfolio. So, theoretical portfolio return line shows the expected return on portfolio which we found greater than that real return on portfolio over the 14- week period. This phenomenon is further explained by CAPM analysis which we will discuss later.

22

Individual securities analysis General Electric Co. (NYSE: GE) General Electric Company (GE) operates as a technology, media, and financial services company worldwide. Its Energy Infrastructure segment produces gas, steam, and aero derivative turbines; generators; and combined cycle systems, as well as provides water treatment services and equipment. This segment also sells surface and subsea drilling and production systems, floating production platform equipment, compressors, turbines, turbo expanders, and high pressure reactors to national, international, and independent oil and gas companies; and offers equipment overhauls and upgrades, pipeline inspection and integrity services, remote diagnostic and monitoring, and contractual service agreements. The companys Technology Infrastructure segment manufactures jet engines, aerospace systems and equipment, and its replacement parts, as well as provides repair and maintenance services for commercial aircraft; military aircraft, including fighters, bombers, tankers, and helicopters; marine applications; and executive and regional aircraft. GE Segments' revenues 2008 in $ millions
$80,000 $60,000 $40,000 $20,000 $Energy Technology NBC Universal Infrastructure Infrastructure Capital Finance Consumer & Industrial

This segment also produces healthcare products, including diagnostic imaging systems; offers transportation products and maintenance services; provides enterprise solutions using sensors for temperature, pressure, moisture, gas and flow rate, as well as non-destructive testing inspection equipment. GEs NBC Universal segment engages in the production and distribution of films and television programs; operation of television stations and cable/satellite television networks, as well as theme parks. The companys Capital Finance segment offers loans, leases, and other financial services to customers, including manufacturers, distributors, and end-users of
23

equipment and major capital assets. Its Consumer & Industrial segment produces various house hold appliances, lighting products, and electrical equipment and control products, as well as provides related services. The company was founded in 1892 and based in Fairfield, Connecticut.

Beta (Risk) Risks to our recommendation and target price include the possibility of a deeper than expected Global recession, as well as greater than expected credit losses in Capital Finance. Bl 1.46 LTD $330,067,000,000 Equity $104,665,000,000 Tax Rate 5.5%

Hamadas equation: Bl= Bu { 1+ (1-Tax rate) LTD/Equity } So, Bu was found to be 0.367 Higher beta of 1.46 supports the above technical chart analysis of stock price of GE compared to DJI. GE has high risks compared to market. So, when market goes down like in current recessionary situation, GE stock price sinks more than a market does. Firms business risk contains no leverage. It is the risk related to its operations. While levered beta contains both financial risks and business risks. Companys lower equity portion as compared to that of long term debt, shows its higher financial risk (Bl-Bu= 1.093)

24

Industry Analysis & impact of current economy The volume of the electricity generated in US is expected to increase at about 1% annually in the five years through 2009. The industry will experience a medium level of volatility over this period with the annual real change in the revenue ranging from a decrease of 10.30% to increase of 4.9%. The impact of the current recession on this industry will be negative. The lower level of the commercial property development, rising level of unemployment, falling company profits, have in particular had a hard hit on the company. Lower level of capital expenditure will be reduced in the light of the recession which will drag down industry growth further. A slower global economy will also impact the export markets. Sales in the electrical equipment will be impacted by a downtown in the residential building activity and industrial production. The top five players account for the 33% of the industry revenue. Out of which GE contribution is 7.1%. The main factors affecting the industry performance is the downstream demand, industrial production index and the real GDP growth. 14 Company analysis & influence from financial & economic events G.E.'s industrial business is buffered from the cycles of big-ticket equipment orders by its services business, which involves maintaining, repairing and upgrading industrial products. In fact, services account for 30 percent of the revenue of G.E.'s industrial businesses, and 70 percent of the profits. Profits at G.E.'s media and entertainment unit, NBC Universal, fell 45 percent, pulled down by weak advertising for broadcast television and online and declining attendance at its theme parks. Profit margins fell in 2005, despite slow growth in labor costs, due to increases in material costs, which were not fully passed on to customers in the form of higher unit selling prices due in part
14

http://www.geconsumerproducts.com/pressroom/press_releases/company/company/ge_estaraward

_2009.htm
2

IBIS World, Industry outlook, SIC Code 33531 www.ge.com

25

to competitive pressures from imports. Industry profit margins are expected to improve in 2006 through 2007 due to: continued real growth in revenue; a greater concentration on higher margin products; improved pricing; industry consolidation; and the impact of company productivity and cost initiatives (such as from previous reductions in employee numbers, which increased revenue per employee). Profit margins will come under some pressure in 2008 due to higher raw material prices and a slowdown in sales in the last quarter. Margins in 2009 will be impacted by a decrease in sales and in capacity utilization. The value of total US imports of electrical equipment is expected to increase at an average annualized real rate of 5.1% in the five years through 2009. China increased its share of imports of industry products into the US, from 9.9% in 2004 to 14.6% in 2008. Product and service differentiation & diversification through globalization GE offers one of the most comprehensive portfolios of product for the energy industry. It offers technology for oil and gas, fossil, nuclear, solar and wind applications. It works after providing the most innovative ways to produce efficient and reliable power. Thus it helps the world thats demands a reliable supply of clean and dependable power. It moves from providing a simple maintenance service to sophisticated technology upgrades. 2008 Revenues in $ billions
US Europe Pacific Basin Middle East & Africa 3% 5% 13% 24% 8% 47% Americas Other Global

Source: GE Annual report 2008 1

The U.S. Department of Energy and the U.S. Environmental Protection Agency have awarded GE Consumer & Industrial the ENERGY STAR Sustained Excellence award for the fourth straight year. Also this marks the sixth year GE has been acknowledged as an ENERGY STAR
26

Partner of the Year. These awards recognize GE's tremendous efforts to create high-performance household appliance and lighting products that help reduce energy spending and protect the environment. GE has introduced a new product that is first incandescent-shaped energy smart CFL bulb. It accepts this product to be accepted by the people that want the energy savings and long life performance. GE Consumer and Industrial span the globe as an industry leader in major appliances, lighting and integrated industrial equipment, system and services. Thus GE initiatives to aggressively bring the market new technologies that help consumers meet pressing environment challenges, to deliver comfort, convenience and electrical protection and control. Thus being consumer oriented helps it to gain more profitability and thereby bringing it market share to boost. GE Global Exchange Services and GE Systems Services, to enter the burgeoning worldwide market for business-to-business e-commerce. Through the effort, GE plans to compete with the upstart leaders in the market, Commerce One and Ariba. GE Global Exchange Services will focus on four markets: Internet data exchange, enterprise application integration software, procurement software and services, and trading partner exchanges. GE Systems Services will provide global technology support to GE Global Exchange Services activities. Competitive analysis Siemens is Europe's largest electronics and electrical engineering company with worldwide operations in the industrial automation and control, information and communications, lighting, medical, power transmission, and transportation sectors. In the year ended September 30, 2007, Siemens generated net sales of approximately US$105.9 billion. The company's US subsidiaries accounted for 21.7% of consolidated net sales in fiscal 2007, and the US accounted for 35.2% of consolidated non-current assets. The company has recently focused on expanding operations in the US and has reorganized their US operations as Siemens Corporation. Citigroup Inc. doing business as Citi, provides a range of financial products and services to consumers and corporate customers. It mainly does its business through four segments: Global Cards, Consumer Banking, Institutional Clients Group and Global Wealth Management. Thus it involves itself in providing a wide range of services including the various credit cards, consumer
27

financing, loans, securities and banking activities to advisory financial planning and wealth management. Electric equipment manufacturers in the US; Market share 2008
Rockwell Automation, Inc. 9% 7% 6% 6% 58% 5% 4% General Electric Company Siemens AG ADS ABB, Limited ADR Eaton Corporation Baldor Electric Company 3% 2% Schneider Electric SA Cooper Industries Limited

Source: IBIS World , FDU online library 1

Citi announced today it is providing direct custody and clearing services (DCC) to clients in the Ukraine. This is the eighth new market Citi has opened in two years taking its proprietary network the largest in the world to 52 markets. Citi currently serves 27 markets in Europe, the Middle East and Africa. This will help it to give better services to its members and get hold to profitable profits and maintain the high quality of the services. This helps the capital market by providing the services required by the broker dealers and global custodian to support the trading and the investment activities around the world. Global Transaction Services offers integrated cash management, trade, and securities and fund services to multinational corporations, financial institutions and public sector organizations around the world. With a network spanning over 100 countries, Citi's Global Transaction Services supports over 65,000 clients. As of 4th quarter 2007, it held on average $245 billion in liability balances and $13.1 trillion in assets under custody. 15

http://www.citigroup.com/transactionservices/home/about_us/press_room/current/2008_0416.jsp

28

Options Yes. There are options available on stock of GE. Maximum volume of call options were found to be in the money and put options were found to be out of the money. This volume trading of options indicates that investors expect the stock price of GE to go down from its current price of $12.69 as of May 1, 2009. So, we can say that current GE stock may be overpriced. Capital structure and Bond rating As of December 2008, Long term debt 330,067,000,000 Short term debt 248,610,000,000 Total Equity 104,665,000,000

Total Debt= 330,067,000,000 + 248,610,000,000 =$ 578,677,000,000 Debt in Capital Structure= Total debt/ Total debt + Total equity= 84.68% with 57% in long term debt & 43% short term debt. Rating Agency Standard & Poors Fitch Bond rating AA+ AA

Bond yield Vs. Treasury yield curve We have taken following bond into consideration: Price Coupon rate Maturity date First coupon date 105.00 5% Feb 1, 2013 Aug 1, 2003

29

Stock ratings The Street ValuEngine Price Target research Standard & Poors HOLD Positive Buy D-F: Negative- lowest; Strongly underperform in future HOLD with $ 14.00 12-month target price

Thus, we conclude that stock price of GE is likely to go up if you hold it for considerably long term.

Upper Management Team Jeffrey Immelt Jeff Gaspin Peter Ehrenheim Keith Sherin Michael Neal Chairman & CEO President President SR VP & CFO Vice Chairman

30

McDonalds Corp. (NYSE: MCD)

We can conclude from above chart that MCD has almost doubled the stock returns over the last 5 years. Companys cost effective fast food for consumers, makes it give stable returns over last year of bear market or recession. McDonalds Corporation, together with its subsidiaries, franchises and operates McDonalds restaurants in the food service industry worldwide. Its restaurants offer various food items, soft drinks, and coffee and other beverages. As of December 31, 2008, the company operated 31,967 restaurants in 118 countries, of which 25,465 were operated by franchisees; and 6,502 were operated by the company. McDonalds Corporation was founded in 1948 and is based in Oak Brook, Illinois.

Beta (Risk) Bl 0.77 LTD 10,186,000,000 Equity 13,382,000,000 Tax rate 30%

31

Hamadas equation: Bl= Bu { 1+ (1-Tax rate) LTD/Equity } Thus, Bu was found to be 0.5023 These betas near to market beta of 1, indicates the same volatility as the market has had since last 5 years. MCD has a volatility rank of 97, which is significantly higher than industry rank of 55.16 Firms business risk contains no leverage. It is the risk related to its operations. While levered beta contains both financial risk and business risk. Companys almost equal equity and long term debt portions, show its considerable financial risk (Bl-Bu= 0.2677).

Industry analysis By the turn of the century, in a single day an average of four out of every ten people frequented an eating establishment, and the total portion of the American food dollar spent eating out had grown to 45 percent. Despite being dominated in the advertising media by the mega fast-food
16

Value engine detailed research report MCD

32

chains, such as McDonald's, most restaurants remained small operations into the twenty-first century.17 We believe that impact of current recession on the industry will be negative. Falling disposable incomes and the increasingly frugal consumer, arising from the recession will see this industry suffer in the current period. Consequently, consumers are likely to increase consumption of foods cooked inside the home, thereby reducing their expenditure on eating out. Rising unemployment and falling household incomes pose the biggest threat to industry growth, as consumers become more wary of their spending habits. Further, the high level of market saturation provides limited growth opportunities for expansion. Given that fast food outlets are considerably cheaper compared to full-service restaurants, consumers will shift their eating-out preferences to cheaper alternatives during the recessionary period. As a highly saturated industry with low barriers to entry, industry participation and employment are expected to decrease as the major franchised players continue to consolidate their operations in order to reduce competition. The industry is labor intensive given the need for personal, face to face service and labor input in all areas from acceptance of deliveries, order-taking, serving and cleaning, as well as in the management of each store. Revenue volatility is low due to the very high household penetration rate for quickservice meals. The industry also covers a wide variety of foodstyles, of appeal to changing consumer tastes and demand.18 Company analysis & influence from financial & economic events Since 2003, MCD has been on the move. It has come along with a stock price of $12.50 to $57. Their ability to innovate in the food service cannot be matched by any of its competitors. Although the market had too much move, the companys share is rising as investors are finding safe heaven in the Big Mac. One of the reasons to hold is also the global exposure. The inclusion of the Plan to Win since 2003 has shown a dynamic way in approaching the business.19 The strategy focused by McDonald has helped it in gaining higher sales, revenue and better result for the shareholders. Major focusing in brand affordability, menu variety and other choices it managed in increasing the global sales in spite of the present economic environment.
17 18

Business & Company resource center, FDU online library IBIS World, Industry outlook, SIC Code 5812 19 http://www.cattlenetwork.com/Retail_Content.asp?contentid=289421)

33

Thus the strength of the alignment between the company, its franchisees and suppliers has been the key to McDonaldss success over the years. U.S. Bank and Wells Fargo & Co. both recently announced that theyre offering new lending programs that benefit McDonalds U.S. franchisees. The programs deliver favorable financing options on restaurant acquisitions, rebuilds and relocations, equipment purchases and restaurant improvements. Both banks also stressed that their payments, cash management, and savings and checking accounts and other small-business products can also be tailored to the needs of restaurant franchises.20 The stock price knocked down 14% because the company did so well in the first half of the last year that it was to match the growth rate. But the recent fall in the stock price is just because of the pathole in the drive through lane. McDonald strives to manage its momentum even in this economy. Month after month it has shown stronger than expected sales in the United States and abroad. Lastly the company had delivered a 55 consecutive monthly of increase in the global same store sales. The share of McDonald gained nearly 6% making the company one of the only two in the Dow Jones industrial average whose share price rose in 2008. The relentless focus in the recent years in improving the store operation and measuring progress has helped the company strive long. New service and meal menu is another reason for the companies keeping up. Thus it is the motto of quality, service, cleanliness and value that keeps it going. The external factors including the unprecedented volatility in foreign currency rates and commodity cost will bring the pressure on the revenue and the margin comparison on the company that would that would in turn affect the stock prices in the market. Product and service differentiation & diversification through globalization The global comparable sales of MCD increased 7.1% in January, 2009. In addition, the sales for the MCD worldwide restaurant were up by 2.6%. MCD continues to appeal to the customers by offering high quality, affordable meal options and unparalleled convenience. The better
20

http://moneycentral.msn.com/content/P118107.asp

http://www.aboutmcdonalds.com/mcd/media_center.html

34

performance of McDonalds was the result of the convenient operating hours, combination of the menu offerings and promotional activities.

2008 Revenues in $ millions

6% 18% 34% U.S. Europe APMEA 42% Other Countries

Source: MCD 2008 Annual report 1

McDonald provides a great diversification in its services. Most of the restaurants are both counter and drive through with indoor and sometimes outdoor seating. It includes various theme restaurants like Rock and Roll and the 50s theme. Moreover the business model is slightly different from the most of the other fast food chains. Moreover McDonald serves the society by meeting its varied needs whether its pertaining to its taste or the rituals.21 Competitive analysis Burger King is a global chain of fast food hamburger restaurants, which ranked No. 2 in the world behind McDonalds. The company has some 11,565 in the U.S. and more than 70 countries, of which 1,260 are company owned and 10,205 are franchised. Burger King has established several subsidiaries to develop strategic partnerships and alliances to expand into new territories; in Europe, Burger King's subsidiary Burger King Europe GmbH is responsible for the licensing and development of BK franchises in the that market, Africa and Western Asia.

21

http://www.spiritus-temporis.com/mcdonald%27s/emblem-for-globalization.html

35

In Asia, the BK AsiaPac, PTE. Ltd. business unit handles franchising for East Asia, the Asian subcontinent and all Oceanic territories except Australia. Burger king was nominated as the best licensee of the year. This has helped it in providing the services with great speed and also addition of the new product and the new territories.22

Market Share in %, 2008

McDonald's Corp. 13% 10% 52% 5% 5% 6% 6% Yum1 Brands, Inc. Wendy's/Arby's Group, Inc. Starbucks Corp. Burger King Corp. Doctor's Associates Inc. Domino's Inc. Jack in the box, Inc. 1% 2% Other

Source: IBIS World, Fast food restaurant 1

Burger king franchisee has improved the speed of service and operational intelligence with the help of PAR Technology which is an completely integrated technology solution. Through this system the counter along with the back office activities can be carried on simultaneously with ease and speed. It helps in managing the labor, inventory and in store production. Thus it has helped the firm in gaining the operational efficiencies thereby giving customer satisfaction and improvisation of the speed of service. McDonalds opened at $54.05. So far today, the stock has hit a low of $53.03 and a high of $54.14. Over the last 52 weeks the stock has ranged from a low of $45.79 to a high of $67.00.

22

http://www.marketintelligencecenter.com/articles/826583

http://www.ecommercetimes.com/story/10062.html www.nytimes.com

36

Shares of MCD are trading lower after competitor Burger King Holdings reported preliminary third-quarter revenue of $600 million. Options Yes. There are options available on the stock of this firm. When we observe options trading for the firm, the higher volume traded options are found to be out of money. After observing volume trading for both call & put options for MCD, stock of MCD was found to be overpriced. This shows market expectations for the MCDs stock price to fall in specific time. Capital structure & bond rating As of December 2008, Long term debt 10,186,000,000 Short term debt 2,538,000,000 Total Equity 13,382,000,000

Total debt= 10,186,000,000 + 2,538,000,000 = 12,724,000,000 Debt in capital structure= 12,724,000,000/ (12,724,000,000+13,382,000,000) = 48.74% with 80% long term debt and 20% short term debt. Rating agency Standard & Poors Moodys Fitch Rating A Aa2 A

Bond yield Vs. Treasury yield

37

We have taken following bond into consideration:23 Current price Coupon rate First payment date Maturity YTM 106.55 4.125% Dec 1, 2003 June 1, 2013 2.446%

24

MCD bond yield Vs. US Treasury yield 1

Stock Ratings Analyst The Street ValuEngine Price target research Rating B buy with target price $65.45 Positive- buy with fair value $64.70 Positive B- buy with target price $60 in 6

23 24

Yahoo! Finance Corporate bond yield was taken from www.investinginbonds.com

38

months Standard & Poors Strong Buy- with target price of $66 in 12 months

Shares are likely to be viewed as somewhat of a defensive play as the global economy slows, or even contracts, in 2009. Furthermore, the $2.00 per share annual cash dividend is an additional attraction to owning the shares. In summary, we view the shares as recession resistant, but not recession immune.

Upper management team

Name Andrew McKenna Sr. James Skinner Ralph Alvarez Peter Benson

Position acquired Chairman Vice Chairman & CEO President, COO & Director CFO

39

Vanguard Bond Index Fund Short (NYSE: VBISX)

Vanguard Short-Term Bond Index is ranked among 343 Fixed Income General Short funds by S&P's three-year and overall rank of this fund. Funds are ranked on three year Sharpe Ratio. The Fund seeks to track the performance of a broad, market-weighted bond index. Based on an evaluation of certain characteristics of this fund, Standard & Poor's classifies Vanguard ShortTerm Bond Index as a Fixed Income General Short fund. Fixed Income General Short Funds seek current income and preservation of capital. In pursuit of these objectives, the managers of such funds invest primarily in investment-grade corporate bonds, U.S. Treasury securities or bonds issued by U.S. government agencies.25 VBISX fund is from Vanguard family and it has been managed by Davis since January, 2005. It is headquartered in Valley Forge, PA.

25

Standard & Poors, VBISX Fund report

40

VBISX Fund composition

0% 0% 5% Cash Stocks Bonds Other 95%
26 27

Sector weightings
7% 6% 11% Government/ AAA rated A rated BBB rated 76% AA rated

TOP 10 PERFORMING FUNDS IN THIS CATEGORY (BASED ON 3-YEAR TOTAL RETURNS)

Name
28

Ticker

Return

Lipper Leader Total Consistent Tax Preservation Expense Return Return Consistency

1.Vanguard Sh-Tm Bd;Adm 2.Vanguard Sh-Tm Bd;Inv 3.Allegiant:Ltd Mat;I 4.Janus Short-Term Bond 5.Allegiant:Ltd Mat;A 6.Allegiant:Ult Sh Bd;I 7.Northern Instl:Sh Bd;A 8.HighMark:Sht-Tm Bd;Fid 9.Allegiant:Ult Sh Bd;A 10.T Rowe Price ShTm Bd

VBIRX VBISX AINIX JASBX AINRX ASDIX BSBAX HMSFX ASDAX PRWBX

5.88% 5.80% 5.21% 4.94% 4.91% 4.83% 4.70% 4.67% 4.63% 4.58%

26 27

Yahoo! Finance The Wall Street Journal 28 The Wall Street Journal

41

Risk Measurements for 3 years Fund Vs. S&P 500 R squared Beta Alpha 0.00 0.01 0.47

Market Comparison29 For the ten-year period ended March 31, 2009, Vanguard Short-Term Bond Index had an average annualized total return of 4.9%, versus a total return of 5.7% for the Lehman Brothers U.S. Aggregate Bond Index. On a total return basis, this fund ranked 254 within the entire universe of 1,148 funds in the Domestic Taxable Fixed Income category. On a one-year total return basis, this fund ranked 539 within the entire universe of 2,731 funds in the Domestic Taxable Fixed Income category. The fund has outperformed the Lehman Brothers U.S. Aggregate Bond Index in 2 of the last 5 years. Peer Comparison30 For the ten-year period ended March 31, 2009, Vanguard Short-Term Bond Index had an average annualized total return of 4.9% compared with a total return of 3.3% for all Fixed Income General Short funds. This fund ranked 3 within the entire universe of 146 funds in this peer group. The fund has outperformed its peer group index (Lehman Brothers 1-3 Year Government/ Credit Index) in 3 of the last 5 years.

29 30

Standard & Poors, Net Advantage, FDU online library Standard & Poors, Net Advantage, FDU online library

42

Style Composition (S&P 500) 1

This is the reason why we chose VBISX for our portfolio. Because it is composed of majority of short-term and intermediate-term funds and this is ideal for 14-week portfolio investment. Further, as we have seen earlier, 95% of the fund comprises of short term bonds which have Government/ AAA ratings. This shows lower risks compared to that of peers and this makes it one of the ideal choices to invest according to our investment objective.

Rankings/ Ratings Standard & Poors31

Overall Overall style ranking 1-year 3-year 5-year 10-year Overall category ranking

31

Standard & Poors, Net Advantage, FDU online library

43

Domestic taxable fixed income 3-year risk rank Moderately low

Morningstar rating32

32

Yahoo! Finance

44

Family Dollar Stores Inc. (NYSE: FDO)

Years 1 3 5 Source: Yahoo Finance

Stock Returns 4.19% 0.77% 9%

Volatility 8.08% 8.6% 8.40%

We can conclude from above chart and table that FDO has given stable positive average return on the stock over the last 5 years. It is in the retail industry which provides cost effective items and grocery to consumers. We can see the higher returns from the chart over the last one year after official declaration of recession in US in December 2007. It clearly shows that FDO performs better in bear market and provides good returns of the stocks.

45

Beta ( Risk) Bl 0.04 LTD 250,000,000 Equity 1,254,083,000 Tax rate 35.57%

Hamadas equation: Bl= Bu { 1+ (1-Tax rate) LTD/Equity } This was Bu was found to be 0.0354 As we discussed about stock price movements in the current market above, beta supports that. A very low beta of 0.04 shows that FDO has less risks compared to market proxy. So, when market goes up, FDO performs average and when market goes down, FDO performs better than the firms which have higher betas or betas near to 1.

Firms business risks contain no leverage. It is the risk related to its operations. While levered beta contains both financial risks and business risks. Companys higher equity portion as compared to that of long term debt, shows its negligible financial risk ( Bl-Bu= 0.0046).

46

Industry Analysis Discount department stores are also known as discount variety stores, general merchandise discount stores, mass merchandisers, full-line discounters, or discount houses. This industry is dominated by the Wal-Mart, Target, and the Kmart/Sears (the two companies merged in 2005) chains. The common element among all stores in the industry is the focus on low prices. Variety stores can be categorized by price and level of service, and generally fall into one of the following categories: discount department stores, wholesale clubs, supercenters, hypermarts, and so-called category killers.33 INDUSTRY REVENUE & FORECASTS34

We forecast that this industry will grow at an average annual rate of 1.8% during the five year period to 2013. Retailers will find 2009 a difficult trading period. The depressed economic climate is likely to continue throughout the rest of 2009, as deteriorating conditions lead to further increases in the unemployment rate, and income growth remains stunted. During the later part of the year, consumer sentiment may improve slightly, which may have a positive affect on industry sales.
33 34

Business & Company Resource Center, FDU online library IBIS World, Industry Outlook, SIC Code 5331

47

In 2010 and 2011, revenue growth is expected to gain some momentum. Growth will once again be aided by the incremental benefits associated with new store growth. This will not only include new entrants but also new store expansions by the major players seeking to expand its customer base. Households will respond by increasing purchasing from industry stores. Overall retail consumption will increase in 2010 but will show the largest jump in 2011, further signs of an economy well on its way to a recovery. The remainder of the outlook will be positive, with growth returning to pre-recession rates. However, the industry is expected to lose a portion of its share from the overall sector, highlighting the industry's inability to attract traffic despite deep discounts.35 Company analysis and influence from financial & economic events Family Dollar's report of strong first-quarter gains followed a year in which the company's stock price soared by 30%, leading all companies on the S&P 500.The shares of the family dollar surged 11 percent after it gave the second quarter profit forecast. The second quarter sales for the company increase 6.4%. Family Dollar Increases Regular Quarterly Dividend by 8%. Family Dollar Stores benefited from bargain hunters. Shares soared after the North Carolina-based company, which runs 6,600 stores, raised its fiscal second-quarter estimate.3637 There is recession in the economy and moreover there are too many layoffs. Consumer is moving to value oriented retailer being more concerned about the budget. Thus this is one major reason for the retailer like the family dollar to gain more customers which in turn would help in gaining sales and raising the earning s and the market share for the stores. Moreover the diverse chain of product offered by the family dollars also helps in gaining many customer as one can fulfill his need of any product in the a store.
On other hand the increase in the dividend. For the consecutive 33 year reflects the stores confidence in the long term growth opportunity. Thus this is also adding to the stock value rise of the store. Moreover the family dollar is trying to carry on the plan for the budget price food at its stores which would be an added help in incorporating a more smooth sale system that can result in more profitability and rise in the market price.
35 36 rd

IBIS World, Industry Outlook, SIC Code 5331 MARKET WATCH, BUSINESS Pg 16A 37 http://www.familydollar.com/news.aspx?p=news&nyo=0

48

Significant product or service changes or developments

Moreover FDO is termed as the best performing stock in the S&P 500 for the year 2008. This is because it is one of the simplest and the lowest cost retailer in the country with just over 6600 stores. The reason behind this is the technical and the fundamental moves which make the stock of the FDO go bullish. It has set at least four higher lows and higher highs over the past six months. In addition it is 20% below the 52 week high and 35% below its all time high. Family dollar stores are concentrated more where the housing and the apartment rates are going up in low income areas. This means that more people coming through the doors and through the check-out lines. Family Dollar leases

the majority of their real

estate. With the mounting troubles of commercial retail property companies, Family Dollar will likely be able to negotiate "no-change" lease rates as they come up for renewal and in some cases they should be able to secure lower rates just to re-sign.38
With the shift in the economy, family dollar is actively altering its product mix to focus more on consumables and less on discretionary items. It is trying to reinforce more promotionally priced offerings and expand its assortment of the key consumables such as food. This is helped in grasping better returns on inventory investment and increased profitability. The new strategy includes the revamping of Family dollars point of sale technology for quicker check out customer service as well as the addition of the food stamp and credit card payment option. Thus promotional and private label goods and leveraging the synergies are helping Family dollar to be nicely positioned to compete even in the tough times. Competitions in domestic & multinational market One of the major competitors of Family dollar can be considered as Wal-Mart. It is one of the largest retailers. It works on the mission of We save people money so they can live better. Country by country; Wal-Mart is trying to move with a vision to become a global brand, just like Mc Donald and Coco-cola, having monopoly over the global retail market. Wal-Mart works on the strategy of corporate takeover in the other countries. Entering a new market its tries to buy an already fully operated company and slowly take over it. Thus in this way the competitor gets eliminated and Wal-Mart can gain real estate. But by
39

38

http://seekingalpha.com/article/112929-and-the-winner-is-family-dollar

39

http://www.hometextilestoday.com/article/CA6636495.html

49

doing this it also threatens the small shops in the country as Wal-Mart unstoppable spread continues. In April 2001 the companys international operations stood at 1494 units in total, Mexico 641, Puerto Rico 53, Canada 236, Argentina 11, Brazil 144, China 35, UK 267. Its international sales were 47.5 Billion dollars, which was a 16.6% increase compared to the previous year. International Operating profit was 2.3 billion dollar, which was 18.6% more as compared to the previous fiscal year. This does have a devastating effect in the retail industry worldwide.
40

Market Share in %, 2008

20% 45% 16% Dollar General Corp. Family Dollar Stores, Inc. Big Lots, Inc. 9% 10% Dollar Tree Stores, Inc. Other

Source: IBIS World, Dollar & Variety sto 1 Options Yes. There are options available on the stock of this firm. Current stock price of the firm as of March 23, 2009 is $ 31.93. When we observe options trading for the firm, the most of the options traded were found to be out of the money. After observing volume trading for the call and put options, we found higher volume trading for put options of strike price $ 30. This shows market expectations for the FDOs stock price to fall in specific time. Moreover, we can conclude that market believes that FDO is overvalued.

40

http://www.projectcensored.org/top-stories/articles/25-wal-mart-brings-inequality-and-low-prices-to-the-world/

50

Capital Structure & Bond rating As of December 2008, Long term Debt 338,714,000 Short term debt 1,068,985,000 Total Equity 1,254,083,000

Total debt= 338,714,000 + 1,068,985,000= 1,407,699,000 Debt in capital structure= 1,407,699,000/ (1,407,699,000+1,254,083,000) = 52.9%

Preferred Stock Company does not have any preferred stocks. Stock Ratings Analyst The Street Money Central @ MSN Rating BUY HOLD

Money Central Analysts' rating 1 Thus, we can say that holding a stock of FDO will turn in to a good investment strategy if you are considering long term horizon. We can suggest selling FDO after end of recessionary period. Because it has less potential to earn higher returns in normal or bull market.

51

Upper management team Name Howard R. Levine R. James Kelly C. Martin Sowers Kiley F. Rawlins Kenneth Smith Position acquired CEO & Chairman President & COO SVP, Finance VP, investor relations & communication CFO

52

Summary In the first week we selected the stock of the companies with low beta and also invested in two bonds one of 13 week and the other of 26 week and options selected were the call and put option to gain in the short run as a hedging tool against the stock. We added a thirty year bond in the third week. This was done in order to lower the risk of the portfolio by weighing more in Government securities. In the sixth week we added one more MF of Vanguard in our portfolio and added a put of McDonald. VBISX is composed of short term and intermediate term funds and this is well suited for fourteen week portfolio investment. Further, 95% of the fund comprises of short term bonds which have Government/AAA ratings and this ratings show lower risk compared that of peers. This makes it one of the ideal choices to invest according to our investment objective. After realization of portfolio beta with our investment objective, we chose GIS and DNA because of their extremely low betas and there recession resistant characteristics. During the seventh week, we exercised JPM put option (400) at the exercise price of $ 23.75 and gained $1000 but we could have lost more than $3000 if we didnt have the put option for JPM. In the ninth week we sold off the stock of the DNA, because DNA was acquired by Roche Pharmaceuticals. Portfolio formation and Diversification The first step in the formation of the portfolio starts with selecting the objective. This would result in the asset allocation. Asset allocation is the stage of investment process in which the most appropriate investment instruments are selected. We have invested in few stock, mutual fund, bond, Treasury bill and options. Thus the portfolio is diversified and opts to gain the benefit of diversification. We have even maintained good amount of cash on hand that can be utilized later in adding few more securities to our portfolio. The risk and return factor also plays a major role in the formation of the portfolio. Higher the risk higher the return. One needs to take risk in order to earn return. Diversification improves the risk return tradeoff. Diversification works because the return on the individual security is not perfectly correlated over time. Less than 1 helps to reduce the risk. The benefits of efficient diversification leads to minimizing the risk for a given level of expected return and maximize the return for the given level of the risk. Thus one moves keeping in mind the specific investment goals and the risk level. In our portfolio we selected the objective of preserving the capital thats the reason we have tried investing good
53

amount of cash in the bonds and the Treasury bill. We learned that the statistical measure of risk is standard deviation. The lower the Standard deviation lower is the risk and vice versa. Moreover a well diversified portfolio should include 9-14 securities and we do have considered this point in our portfolio formation as it includes 10-15 securities in it. Market Efficiency In an efficient market the prices of stock respond quickly and accurately. Technology, Number or traders, Communication and other resources have made all the information available and have created the capital market efficient. Thus the technical and the fundamental analysis play a major role in better implication of the efficient markets. Technical analysis is all dependent on the correlation between the securities considering the study of the past performance using the past data to speculate the future. Fundamental analysis relates to the financial statement, the market and the competitors. It states that every security eventually sells for its intrinsic value. Thus both of this analysis helps us a lot on deciding our portfolio return. In our portfolio we tried selecting the stock considering the financial statements of the companies. Moreover the fundamental analysis of the company was taken into consideration while working through the project. This states that fundamental analysis is based on the foundational logic.4142 Options A security whose value is derived from the underlying one or more asset is termed as option. It gives the holder of the option the right but not the obligation to buy or sell. Thus it helps the investor to gain the advantage of the inherent leverage. Thus the holder will benefit greater return in comparison of buying the shares due to the inherent leverage. We invested in the call and put option of the Rio Tinto and JP Morgan Chase initially which we exercised at maturity moreover in the later stage we even invested in the put option of the McDonald. As of May 1, 2009, We made a loss of $ 200 as put premium because we did not exercise our put option as it was out of money. We managed to cover loss on put option by keeping sufficient cash balance in our portfolio.

41

Random Walk Down Wall Street, Malkiel. Security and Portfolio Analysis, Douglas and Janis.

42

54

At last trading day of portfolio, our put option was out of money. So, we did not exercise it. Therefore, it ends up with loss of $ 6.2 per stock of MCD. S0= $ 58.2 (Jan 30, 2009) ST= $ 52.4 (May 1, 2009) Strike price= $ 50 Put premium= $0.4
Max. Profit of $ 49.6 $

Breakeven point at stock price of $ 49.6 ( S < E) E= 50 and maximum loss of $ 8.6

Stock Price
Another breakeven point at stock price of $ 58.6 (S>E)

Max. loss of $ 8.6

Trading strategies One of the utmost important strategies for the trading is diversification. It is well said that never to put all eggs in a single basket. Thus we tried using this strategy of diversification in our project whereby we invested in the varied stock of the companies and even invested in the Treasury bill, options and Mutual fund in order to gain the advantage of the diversification. We tried to diversify by investing the capital in the stock of the companies like McDonalds, Wal55

mart and Family Dollar that tend to move steadily in such recessionary period. Investment in bonds and Mutual funds and Treasury bills, which gives the advantage of liquidity and being risk free. Thus having low correlation between the securities helps to gain the benefit of diversification. The change in one security will not bring a simultaneous change in value and direction of the other security. This is how diversification helps in gaining in a portfolio. Hedging can be termed as the one of the best strategy in order to follow the capital preservation goal. It is a way of protecting the investment by reducing the risk that is involved in holding a particular stock. We have utilized the hedging strategy by buying the put option in our portfolio. Through this we tried to offset the risk that the price of that particular stock will fall. We even bought the call option to offset the price of that particular stock to rise in the near future.43 Long term horizon can be beneficial in case one chooses proper asset allocation. Even though our project was for short period of 14 weeks, we tried to include Mutual fund and the Treasury bond that cannot give short term profit. Moreover long term horizons we tempt to move keeping in mind the economic conditions and the other factors that affect the market and that brings a risk return tradeoff in the picture. Thus we tried to adjust our asset allocation keeping in mind the long term goals even though we were given this project for a short period of time. We tried investing in the securities assuming the long term goals. Short term and long term diversification Short term and long term analysis: We were given a project that was stretched for 14 weeks. This could be considered as the short term projects because it lacked the gain of time diversification that could be achieved in case of long term investment. It is said that longer holding periods have historically lowered the risks associated with the stock investing. In other words as with the stock return, the standard deviation and the covariance fall consistently as the length of the holding period increases. Thus the annualized standard deviation declines as the time horizon increases. This is called as time diversification. Thus our project being short term we could not gain the benefit of the long term diversification. It only resembles the short term volatility and the temporary gain or loss for the portfolio.44

43 44

www.stocktrading.com Pg 493, Security and Portfolio Analysis, Douglas and Janis

56

Deficiency The only deficiency with this portfolio project we found is time period. We believe that 14 week period is really short period for getting good investment results by following Preserving the Capital objective. Further, diversification has less earning potential in short term period. Following chart explains this deficiency:

12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% -10.00%

10

11

12

13

Portfolio return % NYSE Composite index return % Linear (Portfolio return %)

The straight line shows the trend (Technical Analysis) of getting higher returns on portfolio in long term as compared to that of short term. CAPM Analysis Capital Asset Pricing Model assumes that most of the investor avoids risk and those who do take risk, expect to be rewarded. Market is a fair game. CAPM gives the graphical relationship between the expected return and the standard deviation of the portfolio. In equilibrium the investor chooses efficient combination based on the risk free rate and the market portfolio. The Security Market Line (SML) and the Capital Market Line (CML) both has different risk measures. One uses the Standard deviation and other uses the Beta calculation. But the taste and the preference of the individual help in selection of the securities considering the slope of the CML or SML.45 46

45 46

Class Notes, Investment Analysis. Security and Portfolio Analysis, Douglas and Janis.

57

Risk Free Rate = Treasury Bill Yield for 13 week period i.e. 0.155% Market Return = 7.18% (NYSE Composite Index) What would have been the expected return based on Market return and Beta? E(Ri) = Rf + [(Rm-Rf)*Bp =0.155 + (7.18-0.155)*0.29 = 2.19% As per the CAPM we should have the return equal to 2.19%. But in our project, our portfolio has a return of -3.07%.

8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00%

1.00% 0.00%

0.2

0.4

0.6
Returns

0.8

1.2

58

Conclusion What your objective would be in case if you need to conduct this project again. In need of conducting this project once again, we would apply the same strategy to select the objective the way we did in our present project. We decided to work with the objective of preserving our capital based on the economy and the market condition. Stock Market is affected by the economic factors like inflation, GDP and NI as well as financial policies like the monetary policy and the fiscal policy. The companies trading their securities on the stock market reflects to the changes in the economic condition according to their beta, correlation coefficient and covariance. At present we selected the objective of preserving the capital keeping in mind the bear market and the recession period. Thus if the market is facing the same situation we will again move with the same objective but in case if the market is bullish its more interesting to work with the objective of maximizing the return or beating the market. Thus keeping in mind the market condition, whether it is bullish or bearish we would be selecting our portfolio objective. Thus this class helped us a lot in making us known with the varied investment concept and the portfolio formation and various calculation relating to it in deep. Given the amount of $ 250000 and working with creating a portfolio and working on it every week was worth learning We learned to know the factors that affect the investment strategy We learned how to calculate the Treasury bill and bond prices We learned about the calculation of the security beta and the portfolio and the importance of the market proxy. Even working with the option and the profit diagram was worth a good experience where we learned about the short and long stock and various diagram in various positions.

59

Appendix-1

Weekly price quotes of securities in portfolio47

47

Yahoo! Finance The Wall Street Journal www.investinginbonds.com www.treasurydirect.gov

60

Investments

CUSIP/ Ticker

20-Feb-09

27-Feb-09

6-Mar-09

13-Mar-09

20-Mar-09

Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores JP Morgan & Chase Co. Genentech Inc. General Mills Inc. Mutual Funds Legg Mason Opportunity Primary T. Rowe Price Growth Stock Vanguard Short term bond index Corporate Bonds General Electric 36962G3H5 Coupon- 5.625% Maturity- Sep 15, 2017 Semi annual Pfizer 717081AR4 Coupon- 4.500% Maturity- Feb 15, 2014 Semi annual T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond 912795L66 912795Q95 912810QA9 Coupon- 3.500% Maturity- Feb 15, 2039 Semi annual Options Rio Tinto PLC RJTDC.X Expire- 17 April, 2009 Strike- 115.00 BOUGHT CALL JP Morgan Chase JSAOS.X Expire- 20 March, 2009 Strike- 22.50 BOUGHT PUT 5.4 1.98 8.25 0.75 9.6 7.3 6.4 6.8 0.325 0.47 99.264 0.3 0.495 99.257 0.28 0.44 99.258 0.208 0.417 96.7 0.208 0.406 97.23 106.175 106.53 104.571 103.422 104.978 94.604 88.541 77.5 87 91.5 LMOPX PRGFX VBISX 3.99 18.54 3.9 17.75 3.37 16.99 4.11 18.34 10.18 18.57 10.24 JNJ WMT MCD FDO JPM DNA GIS 54.65 50.02 54.57 27.02 19.9 50 49.24 52.25 27.44 22.85 47.97 48.91 52.12 30.36 15.93 50.64 49.19 52.38 31.52 23.75 94.2 52.6 93.72 47.22 51.67 49.59 53.2 30.86

Mc Donald's

MCDOJ.X Expire- March 20, 2009 Strike- 50.00 BOUGHT PUT

0.25

0.05

61

Investments Stocks Johnson & Johnson Wal-Mart Mc Donald's Family Dollar Stores General Mills Inc. Mutual Funds

CUSIP/ Ticker

27-Mar

3-Apr

10-Apr

17-Apr-09

24-Apr-09

1-May-09

JNJ WMT MCD FDO GIS

52.83 52.57 55.01 33.63 50.85

52.15 53.8 56.64 31.9 50.86

51.41 50.66 56.67 34.33 50.84

53.05 50.2 56.09 32.82 49.86

50.92 47.87 54.31 32.79 48.73

52.59 50.05 52.40 32.14 50.48

T. Rowe Price Growth Stock

PRGFX

19.9

19.99

20.39

20.6

20.83

21.11

Vanguard Short term bond index Corporate Bonds General Electric Pfizer T- Bills/ Bonds 13 weeks 26 weeks 30 years T- bond Options

VBISX

10.23

10.24

10.23

10.28

10.27

10.28

36962G3H5 717081AR4

90.685 104.87

87.579 104.074

90.775 106.413

89.921 105.8

89.881 105.777

89.616 107.048

912795L66 912795Q95 912810QA9

0.142 0.381 97.887

0.208 0.411 96.394

0.183 0.391 95.5203

0.142 0.361 94.572

0.107 0.315 93.282

0.155 0.302 90.0323

McDonald's

MCDOJ.X Expire- March 20, 2009 Strike- 50.00 BOUGHT PUT

0.4

0.15

0.03

0.05

0.3

0.4

62

Appendix-2

Price calculations of T-bill, bond and FV of portfolio cash

63

T-bill (13-week) Price= Face value- [1-0.01(discount rate)*days to maturity/ 360] At Jan 30, 2009: Face value Discount rate Days to maturity So, price was found to be $ 9,996.18 Bond (General Electric) Price= PV of bond + accrued interest Where, accrued interest for semiannual bond= Coupon rate/2 * 1000 * weeks from last coupon payment / 26 weeks At Feb 20, 2009: PV Coupon rate Weeks from last coupon payment So, accrued interest was found to be $ 23.7981 And thus, Price of bond was found to be 946.04+ 23.7981= $ 969.84 FV of portfolio cash At Feb 6, 2009: PV ( cash in hands at Jan 30, 2009) BCLR N $ 98,860 2% ( 2/52= 0.0385% weekly) 1 week 946.04 5.625% 22 10,000 0.150% 91 days

So, FV of cash at Feb 6, 2009 in portfolio was found to be $ 98,898

64

Appendix-3

Portfolio beta calculations

65

Stock Beta of stock is BL; directly taken from any source. We have taken these figures from Yahoo! Finance. Bond Bonds beta BD shows the only risk related to companys debt. So, it is the difference between companys levered beta and unlevered beta. To estimate this finance risk of the company, we need to calculate unlevered beta and that is done by Hamadas equation. Hamadas Equation: BL= BU [1+ (1-tax rate) LTD/ equity ] To explain this, we have taken Pfizers bond into consideration: LTD= $ 14,531 millions Equity= $ 57,556 millions Tax rate= 17% BL= 0.68 Thus, Bu was found to be 0.562 and this gives rise to bonds beta= 0.68-0.562= 0.118 Cash & government securities They are considered to have beta of 0 as they are assumed to be risk free securities/ assets. Portfolio beta Portfolio beta is weighted average of individual securities beta calculated by above mentioned procedures. So, Portfolio beta= Wi * Bi ; that is found to be nearly 0.29

66