Portfolio Theory Investment Report

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December 10th, 2013.

PORTFOLIO THEORY INVESTMENT REPORT

Our investment strategy involved watching financial news closely and investing in stocks that would likely react to the news that day since we had very limited time to invest. We initially had very little knowledge of the US stock market and therefore researched several blue chip stocks to see, which of them had been performing well Cox and Huang (2009) so that we could invest £5 million in pension fund and £5milion in hedge fund as had been requested.

On the 8th November, we placed orders for $3 million of shares, distributed equally between BARC LN, LLOY LN, MKS LN and RBS. On the 11th November, we placed orders to distribute the remaining £2 million equally between additional shares of the aforementioned four companies.

On the 14th November, we also began margin trading, and invested t £1 million of the hedge fund to buy shares in TSCO, WTB, WMW and ULVR, TSCO reported a profit of £266 million (77 cents a share) up from £12 million (4 cents a share) a year earlier, despite only being expected to report a profit of 11c a share. We purchased 2782 shares at £634.15 each and sold them all on 23rd November for £635.96 a share. Our choice to invest in TSCO resulted from their report of second-quarter earnings of 66 cents per share, up from 56 cents a share a year earlier. We purchased 5 655 shares at£ 552.88 a share and sold them all on 23rd November for £554.24 each.

We traded heavily on the 23rd November. We purchased 5545 shares in RBS LN Equity at £679.36 a share after the company retained Top Rank on SVTC’s Solar Scorecard. We sold these shares the next day at £ 679.36 a share after they failed to increase in value. We purchased 433 shares in Taser International at £11.40 a share after it was forecasted that demand for the company’s Axon wearable video cameras would soar due to a change in the stop-and-frisk law in New York City. We continued to hold these shares throughout the entire period, due to the price continuing to rise. At the end of the trading the share price was £15.81.

We also purchased 7 776 shares in Admira at £6.50 a share after discovering that there had been heavy trading in these shares over the past day. The shares had risen in price by 45.3% since June. We held these shares until the end of the trading, in the hopes that the share price would continue to rise. At the end of the trading the share price was at $6.95 per share. We purchased 3082 shares in JKX at £12.90 a share due to the $3 increase in share price over the past ten days. We held these shares until the end of the trading. Their closing price was $14.36. Another stock purchased that day was CAN, due to the recent increase in share price. We purchased 5075 shares at £8.62 a share. At the end of the game their price was £11.60.

We placed an order for 2011 shares fromTLW at $23.32 a share, also due to a £2.98 increase in share price that had occurred over the past 10 days. At the end of the trading, these shares closed at £25.80. We made our first attempts at short selling on the same day. We placed an order to short sell 400 shares in Pandora at £19.96 a share after they announced a second-quarter loss of 3 cents a share, despite being forecasted to earn 2 cents a share. We made a tiny profit, as the shares we bought to cover these later that day were at a price of £19.04 a share. Although the profit seems like it was hardly worth it, this was mostly an experiment to try our hand at short selling.

This helped us to gain some confidence in short selling and we tried it twice more that day with larger orders. We placed an order to short sell 5095 shares in HOIL at $42.45 a share following news that it was being evaluated for a downgrade. We covered these on the 27th November at a price of £41.89 per share. We also placed an order to short sell 1059 shares in CAPC at a price of £158.60, and 4585 shares in PMO at £52.04 a share, for the same reason as CAPC. We covered both of these on the 27th, at a price of £155.85 per share for CAPC, and £51.03 per share for PMO.

On the 29th November, we purchased 2505 shares in MER following news of a buyout by Amgen. Amgen purchased MER for £125 a share. Unfortunately, due to the limitations of the trading period, our shares vanished without us receiving the gains. The other purchase on the 29th November was 2676 shares in UKM at £87.73 a share, after a general rise in energy stocks following the release of data showing U.S. and global manufacturing activity on the rise. At the close of the trading, the share price was £88.44. We purchased 692 shares in CSR at £121.36 a share, and 3083 shares in THE BKG at £20.20 a share, for the same reason as UKM. At the close of the trading, the share prices were £119.65 and £21.23 respectively.

The next order that day was to short sell 4067 shares in the consumer discretionary SPDR at £58.38 a share; following a recommendation by the Bank of America for investors to start avoiding consumer discretionary names. However, we were unsuccessful in this endeavour, as the share price continued to rise and closed the transaction at £62.04. We also placed an order to short sell 3058 shares in PRU at £76.22 a share, after the probability of US airstrikes against Syria decreased. Raytheon was the manufacturer of what would have been the weapon of choice, the Tomahawk missile. We covered these shares on the same day, at a price of £75.98 per share.

Following the heavy trading we had been doing, we decided to cease purchasing for the next few days and just let our portfolio increase in value from increases in share prices (Föllmer. and Leukert, 2009). We did not trade again.

Causes of Performance Gap

In most cases, when a corporation announces its earnings report, market automatically reacts to that news through adjusting the corporation’s share price (Amenc, Goltz, Martellini, and Milhau, 2010).). This share price is based on the investors’ expectation regarding the company’s earning potential. As Leland (2004) argues earnings are fundamental valuation element while determining the security price, and they are an instrument that could very drastically change the stock price. Since HOILs announcement of the earnings of £3.96 did not meet the expectations of the investors, the stock prices dropped causing the performance gap.

Since our investment strategy entailed a close watch of the financial news daily and investing in securities that would possibly positively or negatively react to the news of the day, we can report that during our investing period the stock market appeared to be efficient in overall. The share prices were comparatively priced depicting the all the available news (Black and Perold, 2002). For instance HOIL’s announcement of the earnings of £3.96 which did not meet the expectations of the investors, were reflected in the decline on the HOIL’s stock prices.

Lessons

From the market share game, I have learned various key issues. To start with, I have observed that often, the share prices of firms within the same industry such as MER and Amgen tend to move in tandem with one another. This is so because the conditions of the market usually affect these corporations in similar way (Detemple & Rindisbacher, 2008). However, in some instances the stock price of a firm could benefit from aspect of negative news of its rival. I have also learnt that news announcements on profits and earnings as well as future projected earnings affected the stock prices as in the case of CAN and Admira whose earnings reports increased and decreased their stock prices respectively. The other thing I have learned is that investor confidence can make the stock price to either fall or rise.

Conclusion

Since now I have some idea regarding the key factors that either makes share prices to increase or fall, in the future prior to carrying out any purchase or investment, I will ensure that I have comprehensive information of the firms that I intend to invest in based on those factors. Also, in future before investing one of my investment strategies would be to hold my stocks for a short period, and obtain short term return, since I have learned that when the stocks are held for longer duration, the stock prices are more likely to be fluctuant.

References

Amenc, N., F. Goltz, L. Martellini, and V. Milhau (2010). New frontiers in benchmarking

and liability-driven investing. EDHEC-Risk Institute Publication.

Black, F. and A. Perold (2002). Theory of constant proportion portfolio insurance.Journal of

Portfolio Management 16, 403–426.

Cox, J. and C. Huang (2009). Optimal consumption and portfolio policies when asset prices

follow a diffusion process. Journal of Economic Theory 49(1), 33–83.

Detemple, J. and M. Rindisbacher (2008). Dynamic asset liability management with tolerance

for limited shortfalls. Insurance: Mathematics and Economics 43(3), 281–294.

Lando, D. (2004). Credit Risk Modeling: Theory and Applications. Princeton University

Press.

Leland, H. (2004). Corporate debt value, bond covenants, and optimal capital structure.

Journal of Finance 49(4), 1213–1252.

Teplá, L. (2001). Optimal investment with minimum performance constraints. Journal of

Economic Dynamics and Control 25(10), 1629–1645.