Case Study 1
George Soros is planning on starting a new business venture to open a chain of specialty Hungarian eateries in California. At the moment, he does not have the sufficient capital to open all of his planned restaurants and is seeking a plan in order to gain the sufficient starting money. Mr. Soros' plan is to invest in a high-return, diverse, and low-risk portfolio of stocks for exactly a year. After the year expires, he will sell all of his investments in order to start his business. To assist with his portfolio, Mr. Soros has approached your team in order to complete a thorough analysis on the optimal investment portfolio which will meet his strict requirements.
To best aid Mr. Soros, your team should address two aspects of the problem: optimal portfolio design based on the strict requirements of Mr. Soros and portfolio performance based on historical records. The description of these problems is in Part 1 and Part 2, respectively.
Part 1
Throughout a series of meetings and conversations with Mr. Soros, he has narrowed down his list of potential stock investments to 20 publicly traded companies. These companies are listed below and are divided into five different industries. Included in the company name is also ticker symbol for the company.
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- Technology:
o Lam Research Corp. (LRCX)
o Micron Technology Inc. (MU)
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- Financial:
o Intercontinental Exchange (ICE)
o Signature Bank (SBNY)
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o Equinix (EQIX)
o Apple Inc. (AAPL)
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o BNY Mellon (BK)
o KKR & Co. LP (KKR)
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- Health Care:
o Humana Inc. (HUM)
o Magellan Health Inc. (MGLN)
o UnitedHealth Group Inc. (UNH)
o Cigna Corp (CI)
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- Consumer Goods:
o Mondelez International (MDLZ)
o PepsiCo (PEP)
o WD-40 Co. (WDFC)
o Clorox Co (CLX)
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- Energy:
o Enphase Energy (ENPH)
o Hess Corp. (HES)
o Atwood Oceanics (ATW)
o Schlumberger (SLB)
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To assist your analysis, Mr. Soros' financial team has provided your group with a set of relevant data for each of the aforementioned stocks. This data includes the Beta, PEG Ratio, and Profit Margin for each company. The Beta measure is an indicator of volatility or system risk compared to the benchmark index where a lower number indicates a less risky investment. The PEG ratio is the Price/Earnings to Growth ratio which is used to indicate if the current stock is under or overvalued (lower values are desirable).
In addition to this data, some necessary information is missing. One of the key missing elements is the yearly return on each stock. Your group needs to find this information using whichever calculation method you believe to be most appropriate. Regardless of the data the return is based upon, the final value should be expressed as a ratio. For example, if the yearly return of AAPL is 1.56, then each dollar invested by Mr. Soros will return $1.56 in a year. The other missing data is the current price of the stock as this price will limit how many share Mr. Soros can purchase in any individual company.
To build Mr. Soros' stock portfolio, he requires your final recommendation to meet certain requirements. Most importantly, Mr. Soros' has set an investment budget of $1,000,000 which cannot be exceeded. Also, he wants as much as possible to be invested so he receives a large monetary return. Since it may not be possible to ensure all one million dollars is invested, the total investment amount must exceed $1,000,000 minus the largest price. Secondly, Mr. Soros wants a diverse portfolio so at least $10,000 must be invested in each industry across all of the companies within that industry.
Additionally, Mr. Soros does not want more than 40% of his total investment capital to be in any one industry group. Furthermore, the average weighted profit margin must exceed 20%, the average weighted Beta is less than 1.2, and the average weighted PEG ratio is less than 1.4 (for all weighted calculations, weight the profit margins using the total dollar investment in that company and assume that all $1,000,000 is invested). Finally, Mr. Soros has already invested in Clorox Co., Equinix, and Signature Bank so he requires that your team's recommended investment in each of these stocks doesn't exceed $50,000.
Based on your conversation with Mr. Soros, you realize that multiple investment portfolios should be created to give Mr. Soros' many options about which portfolio to use. Some of the portfolios Mr. Soros would be interested in are those which meet the following goals:
• Maximize Expected Return Next Year
• Minimize Average Weighted Beta
• Minimize Average Weighted PEG Ratio
All of these portfolios must be subject to the previously mentioned requirements. However, Mr. Soros would also like the portfolios which minimize the Beta or PEG Ratio to still provide a decent return. Since Mr. Soros does not provide a requirement for this return, it is recommended that your group develop your own return threshold. Since the portfolio may be very sensitive to this return threshold, it is highly recommended that multiple thresholds be tested to demonstrate how much the portfolio is affected by the return requirement.
Ultimately, Mr. Soros wants you to perform a complete and thorough analysis to recommend one portfolio of investments based on all of the developed portfolios your team created. Specifically, Mr. Soros want your group to complete the following work:
• Independent research to measure the one-year return of the necessary public stocks.
• An analysis (or analyses) into the best investment portfolio.
• A recommendation of one portfolio which best meets the multi-criteria objectives proposed by Mr. Soros.
Part 2
Given the conversation with Mr. Soros, your team has identified that completing the analysis in Part 1 is all that is needed to satisfy the requirements of Mr. Soros. However, the returns used in the prior analysis do not account for the unpredictability of stock returns. Hence, your team proposes to continue the analysis while accounting for this factor.
To assist in this analysis, historical data has been provided in an Excel workbook. In the worksheet titled "Historical Return Data", up to 52 data samples of historical one-year returns have been recorded for each of the 20 stocks. Similarly, the worksheet titled "Bankruptcy Risk" include a random sample of 50 data points from each of the industries indicating whether a random company within that industry declared bankruptcy within a one-year time span. A company who filed bankruptcy is indicated by a 1 while a 0 indicates the company did not. The samples are only given per industry since it is assumed that all companies within the same industry have the same risk of bankruptcy. Also, if a company is to declare bankruptcy, it can be assumed that all stocks in that company become valueless.
Using this data, your team can provide Mr. Soros with insight into the distribution of possible returns for his investment portfolio. There you should use your portfolio (or test all of your potential portfolios) and fit distributions to the given data so you can create a model which will provide an output distribution of the expected yearly return. From this distribution you should report the expected return as well as other statistics including the minimum and maximum return, etc. Reminder, since Mr. Soros hasn't purchased on stocks by the time you complete this analysis, you are able to modify your recommended portfolio by revisiting the analysis your team completed in Part 1.
Case Study 2
An American entrepreneur (Steven Wobs) is seeking to establish manufacturing plants to produce his three types of music players: the "Tune", the "uPlayer", and the "Mixer". Steven has identified five different countries and locations in which it is possible to establish his manufacturing base but he doesn't know which he should select. Further complicating the decision is the different exchange rates, labor rates, material costs, shipment costs and distances, and tariff charges associated with each country. Mr. Wobs contacted your group seeking your assistance in determining his optimal production locations such that his costs are reasonable, but he also doesn't pay too much in tariff costs or produce too much in greenhouse gases with respect to his shipping. Additionally, he mentions that he has another expedited manufacturing issues he would like you to address as well.
To best assist Mr. Wobs, your team must recommend the ideal manufacturing locations and production amounts for his three products and address his expedited shipping issues with the best, low cost solution. The description of these problems is in Part 1 and Part 2, respectively.
Part 1
To establish his manufacturing operations, Mr. Wobs has determined that he can set up manufacturing plants in any of the following countries: US, Mexico, Canada, China, or Spain. Note that he can select any combination of these and could select all five if that is what you recommend. In order to create a manufacturing plant in any of these countries, Mr. Wobs will have to pay a one-time cost. These costs (and all other data) are given in the Excel file that accompanies this PDF. Note that the costs given are based on the monetary unit of the appropriate country. Your group must look up the most recent exchange rate figures so Mr. Wobs has all of his costs in US Dollars. Mr. Wobs has also been able to estimate total production capacity at each manufacturing plant. By total, this means that the sum of music players produced (all three types) must not exceed this total production capacity. This capacity is 5708 units in the US, 3076 units in Mexico, 5400 units in Canada, 4616 units in China, and 4956 units in Spain.
In addition, Mr. Wobs also wants to identify how much of each of his products to produce in each plant for a year. Clearly he can only produce goods in a location if he decides to actually open a manufacturing plant in that location. The per unit cost (i.e. the cost associated with producing one of the music players) of the material costs, labor costs, and shipping costs are given in the attached file for each music player and manufacturing location. Again, these are given in the local currency which must be converted into US Dollars.
Given this information, Mr. Wobs informs you that your recommendation must also satisfy specific requirements which he has determined. Specifically, he has contracted 5700 Tune players, 3600 uPlayers, and 3230 Mixer players every year and you must ensure that the production across all the operating facilities meets these goals. Additionally, for tax purposes, Mr. Wobs would like 50% or less of his total production (again, across all music players) to be produced in North American countries.
However, he doesn't want to appear to favor international labor too much so he requires 25% or more of his total production to come from North American countries.
Finally, each unit of product manufacturing in a foreign country will suffer a tariff tax. These taxes vary by product and country and are given in the data file. Since the costs of these tariffs are simply wasted (i.e. they are not value added), Mr. Wobs would like to ensure that that the cumulative tariff tax of your recommended solution does not exceed $32,000 US Dollars during a year. Additionally, Mr. Wobs is very environmentally conscience and would like to ensure that the greenhouse gases produced by shipping his final products does not exceed 24,000 kilograms CO2 emitted per year. The CO2 emitted per product for each country are given in the data file.
With all of this information, Mr. Wobs would like to see one final location and production plan as recommended by your team. However, he has many competing goals:
• Minimize upfront (locating the plant) and yearly production (materials, labor, shipping) costs (this does not include tariff costs)
• Minimize CO2 emissions of the shipping plan
• Minimize total tariff costs (without factoring in the other costs)
Since these are clearly competing goals (i.e. you can't satisfy all of them at once), you will have to create multiple recommendations (which you will have to select the best or combine together) satisfying each of these objectives. For each of these objectives, your recommended solution should not violate any of the requirements Mr. Wobs listed. Additionally, since minimizing CO2 emissions or minimizing total tariff costs without considering the sum of the upfront and yearly production costs may result in extremely unreasonable upfront and yearly production costs, it is recommended that your team develop a ‘budget' for this cumulative cost to ensure it doesn't become too high when focusing on the other objectives. Since the final location and production plan may be very sensitive to this budget, it is highly recommended that multiple budgets be tested to demonstrate how much the budget affects the final solution. It is up to your team to determine ‘reasonable budgets' for these tests.
Ultimately, Mr. Wobs needs the following:
• Completed independent research into current exchange rates for the four foreign currencies.
• Completed an analyses into the locating and manufacturing plan. These analyses should focus on the three objective provided by Mr. Wobs given the constraints he provided.
• A recommendation of one final location and production plan which best meets the goals and requirements outlined by Mr. Wobs.
Part 2
In addition to this problem, one of Mr. Wobs's current products, the ‘Ezoo' has recently had manufacturing trouble and Mr. Wobs will not be able to meet his contracted demand without outsourcing. Therefore, Mr. Wobs would like your advice on who he should outsource to, if he should pay for expedited manufacturing, and if he should pay for expedited shipping to meet his need for 200 Ezoos.
Mr. Wobs has three choices on which company to select for his outsourcing decision: Telihard, Naval, and Linx. He does not want to split manufacturing so any solution must have one of these companies producing all 200 Ezoos. All three of these manufacturers provided Mr. Wobs two manufacturing options: standard and expedited. The advantage of expedited is that the company will immediately stop its current product and manufacture all of the Ezoos quickly. Specifically, if Mr. Wobs were to choose expedited, all Ezoos would be produced in 2 days by Telihard for $6.80/unit, 3 days by Naval for $5.91/unit, and 3 days by Linx for $5.58/unit. If Mr. Wobs were to choose standard manufacturing, none of the companies can guarantee the number of days all of the items, but it is cheaper. Specifically, choosing standard manufacturing is $5.78/unit for Telihard, $5.02/unit for Naval, and $4.74/unit for Linx. Additionally, the companies have given the following probabilities indicating the amount of time in days the order could be completed:
Telihard
• 2 days (31%)
• 3 days (42%)
• 4 days (27%)
Naval
• 3 days (25%)
• 4 days (19%)
• 5 days (56%)
Linx
• 3 days (31%)
• 4 days (29%)
• 5 days (40%)
Once the order is complete, the companies agreed to contact Mr. Wobs and confirm shipment details. (NOTE: this is important, Mr. Wobs can choose his shipment options after knowing the exact details on manufacturing - i.e. how many days it took). Similarly to the manufacturing options, Mr. Wobs can choose standard or expedited shipping from each company. If he chooses expedited shipping, Mr. Wobs will pay more, but he will know exactly when the items arrive. Specifically, expedited shipping from Telihard is $10.83/unit and takes 4 days, from Naval is $10.19/unit and takes 4 days, and from Linx is $10.54/unit and takes 5 days. If he chooses standard shipping, it is cheaper, but the companies again can't guarantee a set amount of days. Specifically, standard shipping from Telihard costs $9.21/unit, from Naval costs $8.66/unit, and from Linx costs $8.96/unit. The following probabilities were provided by each company indicating the likelihood of the standard shipping being completed in the indicated number of days.
Telihard
• 4 days (17%)
• 5 days (49%)
• 6 days (34%)
Naval
• 4 days (9%)
• 5 days (41%)
• 6 days (50%)
Linx
• 5 days (21%)
• 6 days (36%)
• 7 days (43%)
The key issue is that Mr. Wobs needs these items in 10 days. So if the sum of the manufacturing time and the shipping time is less than or equal to 10, there is no penalty. However, if this threshold is exceeded, Mr. Wobs must pay a $25/unit penalty to his customers for violating his contract. Mr. Wobs would like your advice on the best manufacturer, manufacturing option, and shipping option to minimize his expected costs (sum of manufacturing, shipping, and any applicable penalty costs).
In addition, Mr. Wobs may be able negotiate with some of the manufacturers (after all, they would like his business). To assist Mr. Wobs with this negotiation, he would like to know the how much the manufacturing costs (for both standard expedited) would have to decrease for each of the non- recommended manufacturers to make their services recommended with respect to average expected costs (same as before).
Attachment:- Capstone_case_study_data.xlsx