Portfolio Workshop. University of Delaware Finance Lab Conference. R. Stafford Johnson Professor Department of Finance Xavier University

Transcription

1 Portfolio Workshop University of Delaware Finance Lab Conference R. Stafford Johnson Professor Department of Finance Xavier University

2 Objectives In this session, I want to cover some of the academic scholarship and teaching subjects that comprise part of the finance discipline and show how I use Bloomberg in these areas. I will draw from some of the Bloomberg exercises that are in Debt Markets and Analysis (Wiley) and in a forthcoming book, Equity Markets and Portfolio Analysis (Wiley). I want to put some emphasis on portfolio analysis. Intent here is to show the breadth and debt of Bloomberg, as well as some of the subtleties. At the end, I hope to engage you in a discussion on how Bloomberg can be used in teaching finance and also in facilitating academic scholarship and research in finance. 2

3 Finance Subjects Stock Fundamental Analysis Portfolio Parameters Portfolio Theory, CAPM, and APT Equity Style Investment ETF Construction Bond Evaluation Total return analysis Equilibrium Bond Prices Level and Structure of interest rates Yield curve Bond spreads and risk Bond Portfolio Construction and Horizon Analysis Swaps and Off-balance Sheet Portfolio Management Derivatives Research 3

4 Fundamental stock analysis Multiplier (P/e) valuation model Relative evaluation of a stock s growth rates and its capitalization rate in terms of risk premium measures Model for estimating earnings-per-share Methods for estimating P/e Comparison of P/e with sector and market indexes. 4

5 5 Risk Premium Analysis Financial Risk: Debt-toearnings and debt-toasset ratios

6 Analysis of growth rates, risk premiums, and relative P/e ratios to determine the stock s equilibrium P/e. Stock Analysis Inputs: Bloomberg s sustainable growth rate = 4.4%; D/E = 0.5; Adjusted Beta =.708; expected market return = 9.5%; riskfree rate = 1.6%; discount rate = k = 7.2%. D / E P 1 1 E = k - g = =

7 Stock Analysis Forecast of the company s eps. Excel multiplier program linked to Bloomberg. Comparison of forecast with analysts forecast (Bloomberg ANR and EE). 7

8 Stock Analysis Revenue Sales Growth Cost of Goods Sold (Revenue) %? in COGS COGS/Revenue Selling, General & Administrative Expense %? in S,G,&A S,G,&A/Revenue Operating Income Operating Margin Interest Expense %? in Interest Foreign Exchange Loss (G) Net Non-Operating Loss (G) Pretax Income Income Tax Expense Effective Tax Rate Income Before XO Items XO Loss (Gain) Pretax Tax Effect on XO Items Minority Interest Net Income EPS Number of Shares 3/31/2011 6/30/2011 9/30/ /31/2011 3/31/2012 6/30/2012 Trailing Next FQ FQ FQ FQ FQ FQ Four Quarters Full Year 12,573 13,878 13,226 14,688 13,093 13,286 54,293 53, % 10.38% -4.70% 11.05% % 1.47% 4.24% -2.00% 7,937 9,007 8,611 9,795 8,426 8,416 35,248 34, % 13.48% -4.40% 13.75% % -0.12% 5.34% -2.00% 63.13% 64.90% 65.11% 66.69% 64.36% 63.34% 64.92% 64.92% 2,990 3,065 2,924 3,386 2,878 2,907 12,095 11, % 2.51% -4.60% 15.80% % 1.01% -2.39% -2.40% 23.78% 22.09% 22.11% 23.05% 21.98% 21.88% 22.28% 22.19% 1,646 1,806 1,691 1,507 1,789 1,963 6,950 6, % 13.01% 12.79% 10.26% 13.66% 14.78% 12.80% 12.89% ,755 1, % -4.55% -3.63% % 79.18% % -6.20% -2.00% (16) - (7) ,200 1,365 1, ,138 1,450 4,795 5, , % 28.50% 27.18% 9.85% 28.03% 28.69% 24.46% 0.00% ,034 3,622 5, ,029 3,594 5,

9 9 Analysts forecast: Bloomberg ANR and EE Stock Analysis

10 Determine the stock s intrinsic value: V = (P/e)(E(eps). Determine if the stock is underpriced or overpriced. Stock Analysis P/E for Kraft: Historical P/e = Recent P/e = 17.7 Based on our estimated EPS of $2.89, the intrinsic values are: V = (16.73)($2.89) = $48.35 V = (17.7)($2.89) = $51.15 V = (17.86)($2.89) = $51.62 Market Price = $41 Analysts estimate of EPS = $2.48 V = (16.73)($2.48) = $41.49 V = (17.7)($2.48) = $43.90 V = (17.86)($2.49) = $44.47 Market Price = $41 IV > P Mkt Weak Buy IV > P Mkt Strong Buy 10

11 Portfolio Parameters Linear regressions for the Disney Corporation and General Electric Both regressions were done on Bloomberg s Beta screen. In each regression, the stock s daily percentage returns are regressed against the percentage changes in the S&P 500 (SPX) for the period from 5/1/06 to 4/28/11. The Beta screen shows the scatter diagram, regression estimates, and qualifiers. From this regression, Disney has a beta 1.067, alpha of.040, σ(ε) of (V(ε) = ), t-statistic = β/ σ(β) = 50.04, and R 2 of GE has a beta 1.158, alpha of.029, σ(ε) of (V(ε) = ), t-statistic = β/ σ(β) = , and R 2 of

12 Portfolio Parameters PC Screen The Bloomberg s PC screen for GE compares the R 2 s, Betas, and alphas for GE and related companies in its industry. Based on its R 2, approximately 50% of GE s variability is explained by market factors. GE s beta of exceeds the beta of most of its peers, with the exception being Caterpillar and Abbot Labs. GE is only one of two in the peer group with a negative alpha for the regression period analyzed. 12

13 Portfolio Parameters, PC Screen On the PC screen, the Alphas and betas for each stock for the time period selected can be accessed from the Calculation tab and exported to Excel from the Export tab (upper right corner). Each stock s variance of the error, V(ε), can be calculated from the sock s R 2 and its variance (V(r) (V(ε) = V(r) (1 R 2 )) using the stock variances, found by clicking Covariance in the Calculation tab, and R 2 s found by clicking R2 in the Calculation tab. Security Alpha Beta V(r i ) R 2 V(ε i ) = V(r i ) (1 R 2 ) WALT DISNEY CVS CAREMARK CORP KROGER CO AFLAC INC JOHNSON & JOHNSON DUKE ENERGY CORP EXXON MOBIL CORP PROCTER & GAMBLE MICROSOFT CORP ARCHER-DANIELS-MIDLAND S&P 500 INDEX Data imported to Excel from PC Monthly Data Period: 8/13/2006-8/13/

14 Portfolio Parameters, CORR Screen A B C D E F G H I J K L M 1 Security ADM AFL CVS DIS DUK JNJ KR MSFT PG XOM 2 ADM AFL CVS DIS DUK JNJ KR MSFT PG XOM E A k W W W Cov w 1 ADM w 2 AFL w 3 CVS w 4 DIS W / (W cov) = V(R p ) w 5 DUK = w 6 JNJ w 7 KR w 8 MSFT w 9 PG w 10 XOM E p * λ λ W /

15 Markowitz Efficient Portfolios Using the Bloomberg Asset Allocation Optimizer Asset Allocation Optimizer This application requires Excel's Solver Add-in to be installed. Go to Help tab for directions. You may also contact Bloomberg Help Desk. Asset Allocation Optimizer uses either historical returns or user-customized forecasted returns to generate optimal portfolios. Follow directions on the left side of the screen to start using the application. You may customize start and end dates for historical return, standard deviation, and corre 1) Enter Tickers ----> Tickers: Adm Equity AFL Equity CVS Equity Dis Equity Duk Equity JNJ Equity KR Equity MSFT Equity PG Equity XOM Equity 2) Enter Asset Class ----> Asset Class: ADM AFL CVS Dis Duke J&J Kroger Microsoft PG Exxon You have chosen forecasted rates. Please go to the Forecasted Rates Tab to review your return assumptions. ARCHER- CVS WALT DISNEY DUKE ENERGY JOHNSON & MICROSOFT PROCTER & EXXON MOBIL AFLAC INC KROGER CO DANIELS- CAREMARK CO/THE CORP JOHNSON CORP GAMBLE CORP 3) Choose Return Type Returns * 0.61% 13.61% 16.91% 19.78% 7.57% 9.07% 15.77% 7.01% 6.99% 5.18% Type 1: Historical Standard Dev 32.5% 43.3% 24.7% 27.6% 18.5% 15.9% 24.2% 27.1% 17.3% 22.1% * For demonstration only; these are not recommendations; please review your inputs carefully. Type 2: Forecasted ARCHER- DANIELS- AFLAC INC ARCHER DANIELS AFLAC INC CVS CAREMARK CORP WALT DISNEY CO/THE CVS CAREMARK WALT DISNEY CO/THE DUKE ENERGY CORP JOHNSON & JOHNSON KROGER CO MICROSOFT CORP PROCTER & GAMBLE EXXON MOBIL CORP DUKE ENERGY ) Enter Dates Below JOHNSON & Start Date: 8/5/2006 KROGER CO End Date: 8/8/2013 MICROSOFT PROCTER & GAMBLE EXXON MOBIL CORP Historical returns, correlations and standard deviations will update according to dates chosen. 5) Review Constraints ----> Min Weight 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Constraints Kept Max Weight 99.0% 99.0% 99.0% 99.0% 99.0% 99.0% 99.0% 99.0% 99.0% 99.0% 6) Press Button - Optimize Objective 1: Portfolio that minimizes risk Risk Free Return: 1.50% Return: 9.80% Standard Dev: 13.8% Weights 0.0% 0.0% 14.6% 0.0% 13.9% 38.6% 5.4% 0.2% 27.3% 0.0% Objective 2: Portfolio that maximizes return Risk Free Return: 1.50% Return: 19.75% Standard Dev: 27.4% Weights 0.0% 0.0% 1.0% 99.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Objective 3: Portfolio that maximizes Sharpe Ratio Risk Free Return: 1.50% Return: 17.47% Standard Dev: 19.1% Weights 0.0% 0.0% 33.9% 33.1% 0.0% 0.3% 32.7% 0.0% 0.0% 0.0% Objective 4: Portfolio that maximizes return (*given a volatility) Risk Free Return: 2.50% Return: 15.53% Standard Dev: 17.0% Weights 0.0% 0.0% 31.1% 21.4% 0.0% 21.6% 26.0% 0.0% 0.0% 0.0% Objective 5: Portfolio that minimizes risk (*given a return) Risk Free Return: 2.50% Return: 15.50% Standard Dev: 17.0% Weights 0.0% 0.0% 30.7% 21.4% 0.0% 22.0% 25.9% 0.0% 0.0% 0.0% 15

16 25.0% Markowitz Efficient Portfolios Using the Bloomberg Asset Allocation Optimizer Return 20.0% 15.0% 10.0% Efficient Frontier ADM AFL CVS Dis Duke J&J Kroger Microsoft PG Exxon 5.0% 0.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% Risk (Standard Deviation) Risk Return ADM AFL CVS Dis Duke J&J Kroger Microsoft PG Exxon 13.8% 9.8% 0.0% 0.0% 14.6% 0.0% 13.9% 38.6% 5.4% 0.2% 27.3% 0.0% 13.9% 10.5% 0.0% 0.0% 18.3% 0.0% 10.2% 39.5% 9.2% 0.0% 22.8% 0.0% 14.1% 11.2% 0.0% 0.0% 22.2% 0.0% 6.4% 39.5% 13.1% 0.0% 18.8% 0.0% 14.4% 11.9% 0.0% 0.0% 24.4% 2.5% 4.2% 38.4% 15.3% 0.0% 15.1% 0.0% 14.8% 12.6% 0.0% 0.0% 25.6% 5.8% 2.1% 37.6% 17.5% 0.0% 11.4% 0.0% 15.3% 13.4% 0.0% 0.0% 27.4% 9.7% 0.0% 35.8% 19.5% 0.0% 7.7% 0.0% 15.8% 14.1% 0.0% 0.0% 28.3% 13.2% 0.0% 33.8% 21.8% 0.0% 2.9% 0.0% 16.3% 14.8% 0.0% 0.0% 29.7% 17.2% 0.0% 29.8% 23.2% 0.0% 0.0% 0.0% 17.0% 15.5% 0.0% 0.0% 30.7% 21.4% 0.0% 22.0% 25.9% 0.0% 0.0% 0.0% 17.7% 16.2% 0.0% 0.0% 31.9% 25.6% 0.0% 14.3% 28.2% 0.0% 0.0% 0.0% 18.5% 16.9% 0.0% 0.0% 33.1% 29.8% 0.0% 6.6% 30.4% 0.0% 0.0% 0.0% 19.3% 17.6% 0.0% 0.0% 33.4% 36.1% 0.0% 0.0% 30.4% 0.0% 0.0% 0.0% 20.9% 18.3% 0.0% 0.0% 28.3% 55.3% 0.0% 0.0% 16.4% 0.0% 0.0% 0.0% 23.5% 19.0% 0.0% 0.0% 23.2% 74.2% 0.0% 0.0% 2.6% 0.0% 0.0% 0.0% 27.4% 19.8% 0.0% 0.0% 1.0% 99.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 16

17 Ex-Post Performance, 8/13/2012-8/12/13 Markowitz Portfolio (Blue Rock Equity) and S&P

18 Bloomberg and Markowitz Excel Program Using Elton, Gruber, Padberg, and Manfred Technique for Determining Allocation Rf 10 yr treas Rm Index SPX Start date 8/5/2006 Ending date 8/8/2013 Daily or weekly W Beta Type raw beta Relativev Index SPX Start date 8/5/2006 Ending date 8/8/2013 Daily or weekly W Import Data Type Portfolio ID or Name u Name E(r j ) β j V(ε j ) Rf V(R M ) λ β C i W i KROGER CO % CVS CAREMARK CORP % WALT DISNEY CO % JOHNSON & JOHNSON % DUKE ENERGY CORP % PROCTER & GAMBLE CO % AFLAC INC % MICROSOFT CORP % EXXON MOBIL CORP % ARCHER-DANIELS-MIDLAND CO % 18

19 Portfolio Insurance Portfolio Insurance OSA The value of the XSIF portfolio on August 31, 2012 was $1,221,287 The S&P 500 closed at 1400, and December 1400 S&P 500 put option was trading at ($100 multiplier) and December 1475 S&P 500 call was trading at Portfolio Insurance: n p = $1,221,287/(1,400 x $100) = 8.72 Long Nine S&P 500 put contracts; Cost = (9)(100)(59.70) = $53,730 Range Forward Position 19

20 Market Timing Profit percentage graph without options The value of the XSIF portfolio on August 31, 2012 was $1,221,287, the S&P 500 closed at 1,400, a December 1,400 S&P 500 put option was trading at ($100 multiplier) and December 1,400 S&P 500 call was trading at Synthetic Long Position: Short: n p = $1,221,287/(1,400 x $100) = 8.72 Long: n c = $1,221,287/(1,400 x $100) = 8.72 Cost = Cost = [(9)(100)(59.70)] [(9)(100)(57.05) = $34,290 = $2,385 Profit percentage graph with options For 20% plus and minus range in value, the portfolio s profit and loss percentage ranges between 11.57% and % For 20% plus and minus range in value, the option-enhanced portfolio s profit and loss percentage ranges between 31.38% and % 20

21 Efficient Markets : Style Portfolio Stocks with the potential for consistent earnings and dividend growth without high volatility: Market Cap.: Greater than or Equal to $2.0B P/E (TTM Intraday): Less than or Equal to 20 Book Value Growth (5-Yr Avg.): Greater than or Equal to 5% EPS Growth: 5-Yr Hist.: Greater than or Equal to 10% Ret. on Equity (TTM): Greater than or Equal to 20% Beta: Less than or Equal to 1.25 Divd. Growth Rate (5-Yr Avg.): Greater than or Equal to 5% 21

22 Stocks with the potential for consistent earnings and dividend growth without high volatility. Efficient Markets Style Portfolio 22

23 Bond Evaluation Total Returns Equilibrium Bond Prices Level and Structure of Rates Yield Curve Analysis Bond Risk and Spreads

24 Total Return and Horizon Analysis TRA The TRA screen calculates total returns given different interest rate case. The user can select different horizons, reinvestment rates (semiannual rate, S/A Reinv), and yield shifts (YLD SHFT). The yield shifts are projected basis point shifts in the baseline yield curve (e.g. Treasury) between the settlement date and horizon date. The screen shows the calculated price of the bond at the horizon at the yield reflecting the shift and the annualized total return based on the price, coupon, and interest on interest at the horizon and the current price. 24

25 Yield Curves The IYC9 screen shows the total returns for different horizons and yield curve shift scenarios. The top screen shows the total returns for each maturity from buying a Treasury and selling it one year later given no change in rates. As the total return graph shows, the largest returns occur from the intermediate-term and longterm maturities. 25

26 Option Adjusted Spread Analysis OAS1 Options adjusted spread (OAS) analysis is a method for value bonds with embedded options and estimating the additional spread required to compensate investors for the call risk they are assuming. The OAS1 screen shows the calculated OAS and also the spread of the bond if there were no embedded options the option-free spread. The spread due to embedded options can be estimated by subtracting the option-free spread from the total spread. Using the Black-Derman-Toy model, the estimated an option-free spread for Ford on April 13, 2012 was basis points. Given the total spread of bp, the estimated spread due to Ford s call option is bp. Note: Black-Derman Model has been replaced in the updated OAS1 screen. 26

27 AZS: Bloomberg Altman Z-Score Screen The Bloomberg screen shows the Altman Z-score model applied to Kraft and Ford on 4/15/2012. As shown, Kraft has a score of 3.20, placing it in the unlikely default category, and a relatively stable Z-score history. In contrast, Ford has a Z-score of 0.87, placing it in the increased risk of failure category. However, it Z-score history in which its score has increased from a low of in 3/31/09 to 0.87 on 4/15/2012 indicates a significant improvement in credit quality. 27

28 Bond Portfolios and Horizon Analysis PRTU and PMEN Constructing bond portfolios PRTU From the PMEN menu, some useful screens for analyzing fixed-income portfolios include: PORT: Portfolio & Risk Analytics; BSA: Scenario Analysis; PDSP: Portfolio Display; NPH: Portfolio News; CACT: Corporate Action Calendar; EVTS: Events Calendar; BSA: Scenario Analysis; PSH: Proposed Trade/Hedge Analysis; PCF: Expected Cash Flow; PREP; DRAM: Default Risk Monitor. The PORT, BSA, EVTS, and DRAM screens that are shown in the following slides are for the Xavier Student Investment Fund (XSIF) bond portfolio as of September 29,

29 PORT: Characteristics 29

30 BSA Horizon Analysis 30

31 DRAM DRAM: Default Risk Monitor 31

32 EVTS EVTS: Events Calendar 32

33 Portfolio Duration and Horizon Analysis Total Returns for Portfolio with Duration of 5.5 and Horizon of 6 33

34 Bond Portfolios and Swaps SWPM Tab Screens: Details tab shows the detail of the swap Resets tab shows the reset rate at each effective date (forward LIBOR plus basis point you added to spread; one can change the rates from this tab). Curves tab shows graphically the payments, receipts, and net payments. This tab screen can be adjusted to show each counterparty (pay fix or receive fix), cash flow, and market values. Example: Fixed/Floating swap (Leg 1 is fixed-rate payer); NP = $5.75 million; fixed rate (coupon) = 1.5%; floating rate = 6-month LIBOR + 25 bp; frequency = semiannual; maturity = 5 years; forward curve = U.S. swaps (#23); discount curve = U.S. swaps (#23). 34

35 MARS Portfolio of five corporate bonds with market value of $5.75 million on 5/27/2012 and a generic five-year fixed payer swap with 1.5% fixed rate/libor + 25 bp, NP = $5.75 million Scenario: yield curve shifts: 100 bp to bp. Market value evaluated currently and one year later Analysis: Bond Portfolio only; Swap only; Combined portfolio and fixed payer swap 35

36 Options OSA: Bloomberg s Option Scenario Screen Example: IBM 1. Click OSA 2. On the OSA screen, click the red Positions tab and then click Add Listed Options to bring up options listed on the security. This bring up a screen showing the listed options from which to select 3. After selecting the positions, type 1 <Enter> to load positions and bring up the OSA position screen 4. On the position screen, click the grey Scenario Chart tab at the top of the screen to bring up the profit graph. The profit graph shows profits for the strategy at expiration where the option price is trading at its intrinsic value and also at times periods prior to expiration where the option price is determined by an option pricing model. The profit graphs for different periods can be changed or deleted by using the select options at the top of the screen. 5. From the position screen (click Position tab), one can select different positions and then click Scenario Chart tab to view the profit graph. 6. The Scenario screen (click grey Scenario tab) shows the profit table 36

37 Bloomberg Option Pricing Screen OV or OVME The Bloomberg OV screen calculates the price of an option using the Black- Scholes OPM or the Binomial (Trinomial). The user can input the variability or use the historical volatility or the implied variance. The OV or OVME screen can be used to value exiting options or an option created from an existing security. Example: IBM Call and Put 37

38 Facilitating Research Some Thoughts Screens and Searches Economic Information Industry BI Excel Linking Bloomberg data to your own programs; Bloomberg Excel programs Event Analysis Back-Testing Counties Supply Chain and Input-Output News and Law Monitors Launchpad 38