The Benefits of Fundamental Analysis Towards the Creation of a Successful Portfolio

Name:        De Carvalho Horta, Flavia

Z No.:        Z23349188

FIN4504_001

Dr. Anna Agapova

Stock-Trak Assignment

The Benefits of Fundamental Analysis towards the Creation of a Successful Portfolio

My portfolio only had an overall 0.81% return, mostly because of an ultra-conservative style and high degree of risk aversion, due to lack of experience in the financial market. However, as I learned in class, there is no reward without taking risks. This is the first lesson I definitely learned and will apply towards any investment opportunity in the future.

The two best returns I had were a short position with AT&T, Inc. (T), which I short sold 200 shares for $40.90 and then, bought them for $36.70, which resulted in an HPR of 11.44%. The reason why I chose this security was due to it being overvalued at the time. Fortunately, the strategy was successful, the stock price decreased and I was able to incur a positive return. The second best strategy was a long position on Apple, Inc. (APPL), which I bought 200 shares for $107.57 and eventually sold them for $109.39. Unfortunately I waited too long to sell this security. This is what I regret having hold the position for too long. The HPR was only 1.69%. However, if I had sold it in mid- October (before presidential election and higher market volatility), I could had generated a 9% return on this trade.

In order to diversify and, therefore reduce risk, I also made investments in bonds. My strategy when investing in bonds was to purchase the ones with higher coupon rates and lower time to maturity in order to have a lower risk. However, I acquired them at a premium (price greater than par), but with higher coupon payments (than YTM) as well. As far as for corporate bonds, I purchased 20 American Express bonds (B-AXP-8.125-20052019) for the price of $1,155.41 with a maturity date of 05/20/2019, which will generate me an annual coupon payment of $81.25. For a risk-free bond, I purchased 20 T-Bonds (B-T-8.750-15052017) for the price of $1,037.031 with a maturity date of 05/15/2017, which will generate me an annual coupon payment of $87.50.

My Options were not exercised, since both strategies did not occur as planned (AMZN1602X840 and TSLA1602L170). A put option and a call option, respectively.

For Futures, I had chosen to invest in an index, the S&P500, for the reason that it is an index that reflects the market value of 500 companies in different segments (industrial, transportation, utilities, and financial institutions). Although the market has been shown high volatility lately due to the presidential election and policy uncertainty, my basis for investing in the index is mostly because U.S. GDP is growing in a slow pace, but it is definitely growing, and that will positively reflect in the index as well, in the mid to long-term.

By diversifying, I intended to minimize unsystematic risk (specific asset’s risk), since systematic risk (beta; market risk) remains relevant in diversified portfolios as it is non-diversifiable. Firstly, by investing in treasury bonds (hedging). Secondly, by investing in derivatives, in this case, Futures (speculating), since my Options strategy did not work.

As far as interest rate risk exposure, which is measured by calculating Duration, my portfolio had a Duration of 124.46, since I had a low return on the portfolio, proving what I learned in class, the higher the duration, the higher the interest rate sensitivity and the lower the YTM.