Carnivorous Funds Mini-case
Carnivorous Funds (CF) is a mutual fund company located in Charlotte, NC. They have contracted with TF Inc. an investment advisory firm to consider investments in some additional stocks.
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It is the fall of 2016 and you are a manager at TF. CF has requested that TF perform some financial analysis (focusing on risk and return).
You are directed to calculate the following statistics. TF generally uses the S&P 500 as a market proxy and uses the short-term Treasury bill rate as the risk-free rate.
Your intern will provide weekly closing stock (or S&P 500 index) prices and the risk-free rate over the years 2011 through 2016.
The stock prices are dividend-adjusted (i.e., include the value of any dividends paid).
The data from the intern’s spreadsheet also include the value of the S&P 500 index (S&P500) and the risk-free rate (i.e., the short-term Treasury bill rate).
Use the S&P 500 as a market proxy.
You are to calculate the following:
- Mean return for AEP, IDA, and PNY (arithmetic and geometric means)
- Standard deviation of returns for AEP, IDA, and PNY
- Correlation coefficient of returns between AEP-IDA, AEP-PNY, IDA-PNY, AEP-S&P500, IDA-S&P500, and PNY-S&P500
- Covariance of returns between AEP-IDA, AEP-PNY, IDA-PNY, AEP-S&P500, IDA-S&P500, and PNY-S&P500
- Beta (using returns) for AEP, IDA, and PNY
- Coefficient of variation for AEP, IDA, and PNY
- Treynor ratio for AEP, IDA, and PNY
- Sharpe ratio for AEP, IDA, and PNY
- Jensen’s alpha for AEP, IDA, and PNY
Additionally, your managing director has requested that you:
Write a one-page memo to your client explaining your stock recommendation based on the calculations above. If you must recommend one stock, which stock would you recommend to your client based on the risk-return analysis?
Financial Analysis Application
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