Investment Analysis

Mr. Kevin Smith has been referred to you by one of your current clients. Mr. Smith has committed to move $2.0 million in liquid assets to you for investment. He is a risk taker and is willing to take on substantial risk in his portfolio, however he expects a sizable return on the investments in his portfolio. If you are successful, he will bring you an additional $20.0 million which will result in a significant raise and promotion. Mr. Smith requests that you build the portfolio immediately. He has transferred the $2.0 million to your account and has given you full discretion over his portfolio. He is expecting you to pick multiple types of investments. He would like to see an after-tax return of over 15%. This expectation is significantly over the market as the current before tax return currently stands at 7%. When making investment choices, he understands that there will be a significant percentage of his portfolio at risk as it is the only way to meet his return expectations. He is passionate about the industry of your choice so he requires at least 60% ($1,200,000) of his portfolio be invested in the industry of your choice. The remaining 40% ($800,000) is up to your discretion and can be invested in other industries. For the entire portfolio, he is fine with any type of investment vehicle however he expects multiple investments in his portfolio. Mr. Smith is in a 35% tax bracket (35%). He has over $550,000 in W-2 income reported on his tax return. For the analysis to be complete, you will need to provide the following: 1. A pie graph showing asset allocation (how much is invested in stocks, bonds, options, futures, hedges, etc.) a. Rationale for the allocation based upon risk profile including a summary as to how you developed the asset allocations and why? b. What hedges (protection from risk) do you have in your portfolio and why? c. What is your objective for each investment? For example, are you trying to offset a downturn in another part of the portfolio? Are you hedging a specific risk? For each type of investment, list your goals and objectives. d. What are the tax implications for Mr. Smith on each of your investment choices? Include your rationale in asset selection? Are you seeking to minimize the tax impact on Mr. Smith? If so, what is the impact to Mr. Smith’s personal tax returns in the short term and the long term? e. If your portfolio experienced a sudden drop in value of 15%, what would you do and why? Does your portfolio offer any protection for market volatility? Would you change the portfolio? If so, what are the implications and tax consequences? f. If your portfolio experienced a sudden increase in value of 20%, what would you do and why? Would you change the composition of your portfolio? If so, what are the implications and tax consequences? g. Explain if you excluded an asset category and why. 2. For your industry of choice, pick at least 3 companies to compare and only include 2 in Mr. Smith’s portfolio. Include the following in your analysis: a. For each company, prepare a valuation of the Company. Be sure to include the methodology and variables used for each valuation. Describe how you came up with the valuation and how that impacts your asset selection. b. What has been their earnings trend for the last 6 quarters? Have they met earnings expectations? If not, how much have they been off? What impact has this had on the stock price? c. Describe the industry risks for your industry of choice? d. How does current economic conditions impact your industry? If there was a downturn in the economy, how would these companies be affected? e. What does the competitive landscape look like? For the companies you have chosen, at what stage are those entities at? Are there significant barriers to entry in your industry? f. Is the company innovative? Are they planning to launch a new product sometime soon? g. Which two did you pick and why? What made you decide on the 2 companies you have chosen. Provide analysis and rationale for your selections. 3. For all investments in the portfolio, what is the rationale for your choices from both a macro and micro perspective. This would include: a. Why you selected each asset to include in the portfolio b. Why you selected each of the companies in the portfolio 4. Track your portfolio for a month. Weekly perform a valuation of the company and: a. Examine the asset value changes on a weekly basis and quantify the implications. b. What changes would you make to the portfolio in the event you are not meeting expectations or if you see a change in the industry, environment, etc. (keep in mind that the after tax goal of 15% is an annualized number so any results for a months span of time need to be annualized). c. What changes would you make if your portfolio is over performing and why? d. Examine the returns for each week. Upon completion, examine the returns for the month and annualize your results. 5. At the end of the four weeks, put together a presentation for Mr. Smith as to your rationale, results and the next steps you would take for his portfolio. Be sure to include: a. How each investment in the portfolio performed. b. Any changes you made throughout the month and why. c. If you were to receive his additional $20 million what you would do with it based upon your results and why. This should include what you learned from your selections and why you would make the changes. This would also include if you would change individual selections as well as asset allocations. d. The tax implications for Mr. Smith’s personal tax return based upon the results of his $2.0 million portfolio (annualize your results). e. The return is for each investment f. The return for the overall porfolio          

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