PS5320 Problem Set 3
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PS5320
Problem Set 3
1. Review the Excel spreadsheet which contains data on the components of the S&P 500 index that you used for Problem Set 2. The file contains tickers, market capitalization, industry, ESG rating and ESG score for components of the index.
(a) Suppose you had invested in a portfolio that comprised only the stocks with an ESG Rating of AA or higher. Suppose you invested in this portfolio at the close of trading on September 30, 2021 and you allocated an equal amount of capital to each stock. Download daily closing stock price return data for these stocks from September 30 to March 3. Compute the total returns on your portfolio for the 5 months.
(b) Download daily index level data on the S&P 500 index benchmark for the comparable period. Compute the returns on the benchmark.
(c) Compute the daily difference in return between your portfolio and the benchmark.
(d) Compute the daily tracking error of your portfolio. (NOTE: The daily tracking error is the standard deviation of the daily difference in return between your portfolio and the benchmark.)
(e) Download the daily returns for the Vanguard ETF designed to track the S&P 500 index, whose ticker is VOO. Compute the daily tracking error of the ETF vs. the S&P 500 benchmark for the same time period.
(f) What is the disadvantage of the higher tracking error of your portfolio as against that of the ETF? What is the advantage of your portfolio relative to the ETF?
(g) During the period from September 30 to March 3, did your ESG portfolio perform better or worse than the the S&P 500 benchmark? Why?
2. Your rich uncle asks you for some investment analysis to help him construct a portfolio. He wants to build a portfolio of high dividend stocks that have passed an ESG filter. You agree to help him. Use the screening tool in Factset (the Equity Starter Screen, Idea Screening should be sufficient for this).
(a) Build a set of stocks that pass the following crieria:
● public companies headquartered in the US
● market capitalization greater than $1 billion
● trailing price-earnings ratio between 1.0x and 20.0x
● total debt/enterprise value between 0.0 and 0.5
● return on assets between 1% and 10%
● dividend yield between 3.0% and 5.0%
You will likely end up with approximately 50-70 stocks. List the tickers, company names, industry, market caps, P-E ratio, debt-to-EV ratios, dividend yields.
(b) How does the industry composition of these stocks differ from the industry composition of the S&P
500 index? Which 3 industries appear to be over-represented in your list of stocks and which 3 are under-represented?
(c) Obtain the ESG ratings, scores and the IVA-Industry field for as many of these stocks as are available from MSCI ratings (via Columbia Libraries). How does the distribution of ESG ratings differ from the S&P 500 index? Assume that issuers without ESG ratings are rated CCC. Obtain the ESG ratings for these stocks from Yahoo (Sustainalytics). For which stocks is there the greatest difference in ESG rating between MSCI and Yahoo?
(d) Select 20 stocks from among the list from part (a) that pass your own definition of an ESG filter. State precisely what that filter is. Your filter may include an ESG score requirement from MSCI, Yahoo and/or your personal definition of activities that are not acceptable (such as tobacco or weapons).
(e) What would be your suggested method of weighting among the 20 stocks? Why?
3. Obtain the 10-K annual reports for the fiscal year ended May 2021 for General Mills Inc. and for the year ended June 2021 for Hain Celestial Group Inc. Fill in the following information for the two food companies for the fiscal year 2021 ($ amounts in millions):
|
Revenue Interest Expense Net Income Average Stockholders’ Equity Average Total Assets |
GIS ? ? ? ? ? |
HAIN ? ? ? ? ? |
Note: Average Total Assets / Average Stockholders’ Equity is the average of Total Assets / Stockholders’ Equity at the beginning and end of the fiscal year.
(a) Compute the net income margin for both companies.
(b) Compute the return on assets for both companies.
(c) Compute the return on equity for both companies.
(d) Compute the ratio of the standard deviation of revenue to mean revenue for the past 5 years for both companies.
(e) Explain why the ratio of the return on equity to return on assets is so much higher for GIS than for HAIN?
(f) Obtain the betas of the two stocks from Factset/Yahoo Finance or another source. Which stock has a higher beta? Which stock would you say has more market risk?
(g) Review the comparative stock price performance of the two stocks in the past year, past 2 years and past 5 years. Which stock has had better momentum?
(h) What is the MSCI ESG rating for each stock? What is the Environmental Pillar Score for each stock? What is the Social Pillar Score for each stock? What is the Governance Pillar Score for each stock? To what extent is the ESG rating a good representation of the three underlying Pillar scores?
2023-03-07