The State of South Carolina

Investment Analysis and Portfolio Management

FIN 3102 [C6] Group 1 Presenters:

Alastiar Lee, Goh Sau Liang, Laura Nickles, Olivia Heng, Ronald Goh, Serena
Huang
 Case Study: Overview
1. Background

2. Analysis of Exhibit 1

3. Examining the risk and return of 30 Dow Stocks

4. Forming portfolios of various stocks in the Dow 30

5. Country bond and stock data analysis

6. Forming portfolios of various countries

7. Implications and Recommendations

BACKGROUND
• “South Carolina was the only state in the nation to
disallow equity investments for its pension funds.”
Old
Investment
Policy Exclusively on U.S. Allows up to 40%
Government and to be invested in New
Investment
Corporate Bonds equities Policy
 Investing in the Stock Market

•Possibility of Higher Returns

PROS •Risk Diversifications
•Flexibility

•Higher Risk
CONS •Time Consuming
•Long Recovery Time

WHY AND WHY NOT?

2. Analysis of
Exhibit 1
 REAL RATES OF RETURN

• Adjustment for inflation

• Fisher’s Equation:

• Better reflects the percentage change in buying power

 ARITHMETIC MEANS
RETURN
• The average of the sum of the returns

• Tells us the return in an average year over a particular period

• Arithmetic return for T-bills = 0.94%

 GEOMETRIC MEANS
RETURN
• Calculated by:

• Tells us what one actually earns per year on average,

compounded annually
MEANS & STANDARD DEVIATION OF
ASSETS
RISK & RETURN RELATION FOR
STOCKS & BONDS
 RISK & RETURN RELATION

• Standard deviation is a measure of volatility

• There is a reward for bearing risk

• The greater the risk premium, the higher the risk

3. Examining risk &
return of: DOW
30 stocks
 Least
Desirable

Most
Desirable
COMPARIS
4. Forming portfolios of various
stocks of the DOW 30
 2-stock portfolio:
Exxon & General Electric

Exxon General Electric

Arithmetic Mean 0.014461 0.020775
Standard Deviation 0.0036858 0.055978

Covariance (Exxon/GE) 0.000841

Correlation (Exxon/GE) 0.407683
 2-stock portfolio: Exxon & GE
Exxon General Electric Covariance (Exxon/GE) 0.000841
Arithmetic Mean 1.4461% 2.0775% Correlation (Exxon/GE) 0.407683
Std Dev 3.6858% 5.5978%

Proportion of Exxon Portfolio Mean Portfolio Variance Portfolio Std Dev

0% 2.0775% 31.3353% 5.5978%
10% 2.0143% 25.5982% 5.0515%
20% 1.9512% 20.5982% 4.5385%
30% 1.8880% 16.5773% 4.0715%
40% 1.8249% 13.4547% 3.6681%
50% 1.7618% 11.2305% 3.3512%
60% 1.6986% 9.9047% 3.1472%
70% 1.6355% 9.4772% 3.0785%
80% 1.5724% 9.9481% 3.1541%
905 1.5092% 11.3174% 3.3641%
100% 1.4461% 13.5850% 3.6858%
 2-stock portfolio: Exxon & GE

Minimum Portfolio Variance - Exxon/GE Stocks

Portfolio
Proportion of Exxon Proportion of GE Portfolio Mean Portfolio Std Dev
Variance
69.7582% 30.2418% 1.6370% 9.4769% 3.0785%
*Value is obtained by constraining proportions invested in Exxon/GE to be bigger or equal to
0, to ensure that all weights are non-negative values
 2-stock portfolio: GE & GM
General Electric General Motors Covariance (GE/GM) 0.01076
Arithmetic Mean 2.0775% 1.0765% Correlation (GE/GM) 0.07621
Std Dev 5.5978% 7.6217%

Proportion of GE Portfolio Mean Portfolio Variance Portfolio Std Dev

0% 1.0765% 58.0902% 7.6217%
10% 1.1766% 47.36675 6.8823%
20% 1.2767% 38.4316% 6.1993%
30% 1.3768% 31.2850% 5.5933%
40% 1.4769% 25.9268% 5.0918%
50% 1.5770% 22.3571% 4.7283%
60% 1.6771% 20.5758% 4.5361%
70% 1.7772% 20.5830% 4.5369%
80% 1.8773% 22.3786% 4.7306%
905 1.9774% 25.9627% 5.0954%
100% 2.0775% 31.3353% 5.5978%
 2-stock portfolio: GE & GM

Minimum Portfolio Variance - Exxon/GE Stocks

Portfolio
Proportion of GE Proportion of GM Portfolio Mean Portfolio Std Dev
Variance
64.9598% 35.0402% 1.7267% 20.3559% 4.5118%
*Value is obtained by constraining proportions invested in Exxon/GE to be bigger or equal to
0, to ensure that all weights are non-negative values
PORTFOLIO CALCULATIONS
• 2 Asset Portfolio:
PORTFOLIO CALCULATIONS
• 5 Asset Portfolio:
PORTFOLIO CALCULATIONS
• 10 Asset Portfolio:
PORTFOLIO CALCULATIONS
• 30 Asset Portfolio:
COMPARING
PORTFOLIOS
No. of Stocks in Average Std Difference
Mean Return Std Dev (SD)
Portfolio Dev (Avg. SD) (SD - Avg. SD)
1 2.0775% 5.598% - -
5 1.0900% 4.3100% 10.4390% 6.1290%
10 1.2990% 4.1320% 11.3960% 7.2640%
30 1.4290% 3.8160% 7.3110% 3.4950%
Country bond & stock analysis
Country Stock Analysis
Highest Return

Lowest Return
Country Stock Analysis
Highest CV

Lowest CV
Country Bond Analysis
Highest Return

Lowest Return
Country Bond Analysis
Highest CV

Lowest CV
COUNTR STOCK VS LONG-TERM U.S.
DATA
Highest Return

Lowest Return
COUNTRY STOCK VS LONG-TERM U.S.
DATA
Highest CV

Lowest CV
COUNTRY STOCK VS LONG-TERM U.S.
DATA
Highest Return

Lowest Return
COUNTRY STOCK VS LONG-TERM U.S.
DATA
Highest CV

Lowest CV
STOCKS V.S. BONDS
6. Forming portfolios of
various countries
 Germany & Netherlands
Stock
Portfolio:
Germany Netherlands Portfolio

Mean 0.17072 0.20940 0.19006

Std. Dev 0.27074 0.20233 0.22727

Average Standard Deviation = 0.23900

Bond
Portfolio:
Germany Netherlands Portfolio

Mean 0.8997 0.10054 0.09525

Std. Dev 0.08596 0.08493 0.08430

Average Standard Deviation = 0.08545

 Germany & Japan
Stock
Portfolio:
Germany Japan Portfolio

Mean 0.17072 0.09381 0.13227

Std. Dev 0.27074 0.22304 0.19585

Average Standard Deviation = 0.24804

Bond
Portfolio:
Germany Japan Portfolio

Mean 0.8997 0.08700 0.08848

Std. Dev 0.08596 0.06664 0.7149

Average Standard Deviation = 0.07691

 Stock portfolio for all countries
Australia Austria Belgium France Germany Ireland Italy Japan

Mean 0.15993 0.13309 0.20269 0.19387 0.17072 0.23579 0.19954 0.09381

Std. Dev 0.24862 0.32984 0.20257 0.27027 0.27074 0.30178 0.35667 0.22304

Netherlands New Zealand South Africa Switzerland UK US

Mean 0.20940 0.17482 0.20632 0.15936 0.18747 0.16978

Std. Dev 0.20233 0.38070 0.25380 0.24418 0.12026 0.13100

PORTFOLIO: Mean = 0.17833; Std Dev = 0.19954

 Bond portfolio for all countries
Australia Austria Belgium France Germany Ireland Italy Japan

Mean 0.16087 0.09694 0.14409 0.08997 0.15722 0.20952 0.08700 0.10054

Std. Dev 0.13480 0.07311 0.09096 0.08596 0.12423 0.20650 0.06664 0.08493

Netherlands New Zealand South Africa Switzerland UK US

Mean 0.10054 0.14755 0.15591 0.05992 0.15516 0.13092

Std. Dev 0.08493 0.13626 0.13215 0.06500 0.13722 0.12729

PORTFOLIO: Mean = 0.13022; Std Dev = 0.08252

7. Implications
 Existing Investment Policy
Proportion 33.33% 33.33% 33.33% 0.00%
Real Rate of Return Portfolio
Returns
Year T-Bills T-Bonds Corporate Bonds Common Stock

1990 1.6021% 0.0660% 0.6314% -8.7456% 0.7665%

1991 2.4646% 15.7578% 16.3303% 26.6738% 11.5176%
1992 0.5928% 5.0049% 6.3071% 4.6356% 3.9683%
1993 0.1460% 15.0754% 10.1606% 7.0462% 8.4607%
1994 1.1980% -10.1685% -8.2108% -1.3246% -5.7271%
1995 2.7837% 28.1585% 23.8077% 33.7648% 18.2500%
1996 1.8293% -4.1134% -1.8583% 19.1154% -1.3808%
1997 3.5005% 13.9430% 11.0619% 31.1308% 9.5018%
Expected Return 5.6696%
Standard Deviation 7.2583%
Coefficient of Variation 1.2802
 New Investment Policy (with stocks)
Proportion 20.00% 20.00% 20.00% 40.00%
Real Rate of Return Portfolio
Returns
Year T-Bills T-Bonds Corporate Bonds Common Stock

1990 1.6021% 0.0660% 0.6314% -8.7456% -3.0384%

1991 2.4646% 15.7578% 16.3303% 26.6738% 17.5801%
1992 0.5928% 5.0049% 6.3071% 4.6356% 4.2352%
1993 0.1460% 15.0754% 10.1606% 7.0462% 7.8949%
1994 1.1980% -10.1685% -8.2108% -1.3246% -3.9661%
1995 2.7837% 28.1585% 23.8077% 33.7648% 24.4559%
1996 1.8293% -4.1134% -1.8583% 19.1154% 6.8177%
1997 3.5005% 13.9430% 11.0619% 31.1308% 18.1534%
Expected Return 9.0166%
Standard Deviation 9.6048%
Coefficient of Variation 1.0652
 New Investment Policy
(stocks & international investments)
Proportion 12.00% 12.00% 12.00% 12.00% 12.00% 40.00%
Real Rate of Return Portfolio
International International Corporate Common
Returns
Year T-Bills T-Bonds
Bond Stocks Bonds Stock
1990 6.9086% -18.4997% 1.6021% 0.0660% 0.6314% -8.7456% -3.0384%
1991 18.5180% 16.8204% 2.4646% 15.7578% 16.3303% 26.6738% 17.5801%
1992 13.9754% 0.4501% 0.5928% 5.0049% 6.3071% 4.6356% 4.2352%
1993 26.0596% 40.9612% 0.1460% 15.0754% 10.1606% 7.0462% 7.8949%
1994 -8.7197% -1.1574% 1.1980% -10.1685% -8.2108% -1.3246% -3.9661%
1995 20.8600% 14.0301% 2.7837% 28.1585% 23.8077% 33.7648% 24.4559%
1996 12.0228% 17.9109% 1.8293% -4.1134% -1.8583% 19.1154% 6.8177%
1997 13.3197% 27.3085% 3.5005% 13.9430% 11.0619% 31.1308% 18.1534%

Expected Return 10.6674%

Standard Deviation 10.2557%
Coefficient of Variation 0.9614
 Recommendations
• Stay out of the international market
• Is the higher yield of 1.65% justifiable?

NO!
• Foreign Exchange Risk
• Regulatory Risk
• Economic Risk
thank you!
questions?