Graded Assignment 3: Equity holdings for household investors
Investment Analysis
Group assignment – ideally: three students per group.
(25% of the grade
Client #: Kim and Rich (6-12 pages, excluding appendices).
Rich and his wife Kim are both very interested in having your help to invest their funds, and they will pay you a decent amount for it (and let you all use their complimentary passes to Sugar Bowl at Lake Tahoe!). Rich is a chemist (plastics, industrial applications) and works in a large firm located in the Bay Area. His wife has an undergraduate degree in business (University of Virginia, Marketing major), and works for a well-known marketing firm. They have two children (10 and 8 years old), have their retirement needs covered by their
401(k) plans at work, and would like to put together an investment plan. They have been thinking about real estate and actually looked into a couple of places. However, they really dream about sometime buying a special second home –a two-bedroom condo somewhere in Lake Tahoe close to some ski area. Unfortunately, they couldn’t possibly take on any more mortgage debt at the moment because they are still paying the mortgage on their only home. They expect that, 1) they will go on paying off their mortgage on their current house, 2) their salaries and bonuses will not change appreciably during the next 5 years or so, and 3) their stocks will appreciate enough to let them buy an investment home sometime in the future. They expect a $50,000 cash bonus this year, have about $50,000 in the Vanguard 500 Index, and $100,000 in their bank savings account. The options they have been considering are: a) Going forward with the real estate investment, and finding some additional mutual funds in which to invest the excess cash; or b) Putting together a “big chunk” of funds and investing in
individual stocks —target 8 final firms (*). They would like your investment advisory firm to help them with this second option.
Before you talk about specific Bay Area companies, they would like you to clarify the following points for
them. Please limit your answers to one (long) paragraph. They appreciated your comments about preferred stock and cash-dividend stocks but, because of their very high tax rate, they are not interested in stock income at the
moment.
1. Is it a good time to invest in the stock market for Kim and Rich?
2. What about an equity portfolio? Be specific about the amount you recommend Kim and Rick invest in a stock portfolio; in the Vanguard S&P500, if any; and, cash safety, if any.
3. Also, be specific about the dollar amounts invested in each stock and investment percentages in each
Please, target 8 final stocks (*) out of the Bloomberg Radio Bay Area Index http://www.bloomberg.com/quote/BBACAX:IND/members .
4. Kim and Rich have a sweep-brokerage account (Bank of America-Merrill) and –as we noted earlier–
they have a small amount of funds in the Vanguard 500 Index. Vanguard also offers a common stock brokerage account. Should they look into other brokerage options such as full cost, discount, or electronic brokerage?
They would like to have the following work product from you: 1) a two-page summary with your recommendations and answers to the questions above; 2) a one-page summary on how and why the stocks were selected; 3) a summary analysis of each of the companies considered, including a one-page spreadsheet summary table with relevant indicators on the recommended companies.
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