You will use these scenarios and tables to complete the final project.
Client 1:
Ezra, age 26, is single. However, he is dating and preparing to get engaged. He will need roughly $5,000 for an engagement ring almost immediately, and expects he will need $10,000–$15,000 for the wedding in the next 12–24 months. He is currently employed and earns about $70,000 a year in salary. This salary is enough to cover all his taxes and normal living expenses of approximately $4,800. This leaves him with about $1,000 in savings each month ($350 to 401K, $650 to savings). He has been able to save roughly $15,000 to date in a 401K plan from work and about $20,000 in cash savings. His 401K plan has been invested 100% in the stock market, including some sector-specific funds. His other savings have been in interest-bearing savings and cash substitutes such as money market funds. He recently received a windfall of $60,000, and this prompted him to come to you for some advice. The following are few of Ezra’s comments to help guide your thoughts:
- “I understand I am young, so I need to take on as much risk as I can.”
- “I am willing to lose 30–40% on my invested capital if the return is commensurate.”
- “I do like to have a decent sized cushion in the bank in case something happens at my job.”
- “I don’t foresee my risk tolerance changing after I get married.”
- “Do you have any good stock tips?”
Client 2:
Jacob and Rachel, 53 and 52 respectively, are married with four children. Two of the children are currently in college, and two are in high school. They expect the other two children to attend college. The couple has done relatively well for themselves and earn roughly $275,000 before tax between the two of them, which equates to $190,000 after taxes. They live well below their means, and this should allow them to cover all of their children’s college expenses out of pocket, but it will not leave much for them to save over the next six to eight years. Through savings and portfolio growth, they have managed to accumulate $900,000. To this point, they have been moderately aggressive (70–75% equities) with their portfolio, but they feel that they need to begin preparing the portfolio for partial retirement in eight years, and full retirement in 13 years.
- “I know we still need to be somewhat aggressive—we could live until we’re 90—so we need to plan for some growth even in retirement.”
- “We definitely can’t afford to take a big hit in our portfolio. We don’t have enough time to recover.”
- “Our jobs allow us to work part-time in retirement, and we will probably do so as long as we are able.”
- “What do bond yields look like today?”
- “I think we’ll need to draw on 3–5% of our portfolio in retirement. We’d like to earn enough income from the portfolio to cover that.”
CAPM Inputs:
Market Return 9%
Risk-free Rate 0.75%
Stock Analysis Table:
| Symbol | Estimated Beta | Dividends | Earnings | Sales | Free Cash Flow | 5-Year Dividend Growth | Average Industry P/E Ratio | Average Industry P/S Ratio | Free Cash Flow Growth |
| IBM | 0.86 | Use Last Year | Use Last Year | Use Last Year | Use Last Year | 13.7 | 23.7 | 1.12 | 2.60% |
| KO | 0.66 | Use Last Year | Use Last Year | Use Last Year | Use Last Year | 8.3 | 22.6 | 2.2 | 6.50% |
| BMY | 0.78 | Use Last Year | Use Last Year | Use Last Year | Use Last Year | 2.9 | 24.4 | 3.37 | N/A |
| ORCL | 1.1 | Use Last Year | Use Last Year | Use Last Year | Use Last Year | 21.1 | 20.5 | 4.45 | 10% |
| MMM | 0.98 | Use Last Year | Use Last Year | Use Last Year | Use Last Year | 15.1 | 23.8 | 2.59 | 7% |
| BAX | 0.75 | Use Last Year | Use Last Year | Use Last Year | Use Last Year | -16.9 | 36.09 | 3.68 | N/A |
| BIG | 1.04 | None | Use Last Year | Use Last Year | Use Last Year | N/A | 23 | 1.12 | N/A |
| NFLX | 1.57 | None | Use Last Year | Use Last Year | Use Last Year | N/A | 52.5 | 6 | N/A |
| AKAM | 1.34 | None | Use Last Year | Use Last Year | Use Last Year | N/A | 41.8 | 3.58 | 17% |
| GE | 1.12 | Use Last Year | Use Last Year | Use Last Year | Use Last Year | 9.7 | 23.8 | 2.59 | N/A |
Available Assets Table: Stocks listed in Analysis Table and these additional assets
| Symbol | Estimated Beta | Standard Deviation |
| SPY | 1 | 13% |
| IWM | 1.15 | 16.50% |
| EFA | 1.03 | 15% |
| EEM | 1.09 | 20% |
| SHY | 0 | 1% |
| IEF | -0.2 | 6% |
| TLT | -0.48 | 13% |
| LQD | -0.02 | 5.25% |
| HYG | 0.38 | 7.50% |
Ex-post Return Statistics:
| Symbol | Holding Period Return | Standard Deviation | Benchmarks | Holding PeriodReturn | Standard Deviation | |
| IBM | 8% | 20.00% | Growth | 9.6% | 13.1% | |
| KO | 6% | 13.00% | Capital Appreciation | 8.1% | 8.6% | |
| BMY | 13% | 28.00% | Income | 7.7% | 7.2% | |
| ORCL | 2% | 16.00% | Capital Preservation | 5.8% | 5.2% | |
| MMM | 6% | 14.00% | ||||
| BAX | -6% | 16.00% | ||||
| BIG | 13% | 32.00% | ||||
| NFLX | 18% | 45.00% | ||||
| AKAM | 21% | 37.00% | ||||
| GE | 10% | 16.00% | ||||
| SPY | 9% | 11.00% | ||||
| IWM | 14% | 18.00% | ||||
| EFA | 9% | 15.00% | ||||
| EEM | -1% | 19.00% | ||||
| SHY | 1% | 1.00% | ||||
| IEF | 4% | 6.00% | ||||
| TLT | 4% | 13.50% | ||||
| LQD | 7% | 6.00% | ||||
| HYG | 8% | 8.00% |
