HW7 Memo
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The analysts predicted the stock price of Apple (AAPL) over the next month, six months, and year. They reviewed three investment strategies and found that simply owning AAPL stock (Strategy 1) was expected to provide the highest return, though Strategy 2 of insuring half the position could lower risk slightly. Strategy 3 was not recommended as it carried much risk for only slight expected returns above the risk-free rate. The analysts advised contacting them with any other questions.
HW7 Memo
- 1. To: Professor Baker From: Stephen Panetta, John Michael Croft, & Rebecca Thompson Date: 4/22/09 Re: Apple Inc. Stock (AAPL) As requested, we have performed an analysis on predicted stock price for Apple Inc. (AAPL). Additionally, we have reviewed the three investment strategies you submitted to us and have provided advice so that you may select the best one to fit your needs. Our analysis was conducted under the assumption that the risk free rate is .57%. Additionally, our analysis utilizes historical data and is based on past performance, which does not guarantee future results. After conducting our analysis, we have determined the following price predictions for Apple Inc. stock (AAPL). In regards to the strategies you have provided for review, Table 1 summarizes the expected percentage return and value of your holdings at the end of one-year for each, as well as a best and worse case scenario and standard deviation. Since we predict Apple Inc. stock will continue to increase in value, the best strategy to follow to provide you with the highest anticipated rate of return would be strategy one, simply owning the stock. If you are, however, somewhat more risk averse you could follow strategy 2 and insure half of your long position in Apple stock by buying put contracts. This strategy will slightly lower your return but will also lower your risk. I do not recommend Strategy 3 as it is only expected to provide slightly less than the risk free rate of return yet at the cost of incurring much risk. If you have any questions or comments about our analysis of AAPL or any of the strategies considered, please contact us. Table 1 Minimum Mean Maximum Std. Deviation Strategy 1 % Return (82.93%) 6.13% 502.91% 61.92% Ending Holdings $1,855 $11,535 $65,531 $6,730 Strategy 2 % Return (44.19%) 5.49% 355.79% 46.85% Ending Holdings $6,806 $12,864 $55,582 $5,713 Strategy 3 % Return (433.19%) 0.51% 233.20% 168.55% Stock Prices for AAPL Current Price = $108.69 (4/1/09) Predicted Price Volatility (Std. Dev) In One Month $109.25 17.26% In Six Month $111.99 44.55% In One Year $115.32 66.91%
- 2. Ending Holdings $(250) $75.41 $250 $126