Financial Modeling and Valuation
Fall 2021
This assignment should be completed and submitted by Sunday, 11:59PM ET, by end of Module 6.
The term “value trap” refers to the tendency that certain value investors stick to their stocks with possibly attractive price to earnings ratio even when the stocks does not appreciate in price. When in a value trap, a portfolio of value stocks can be flat or even lose money for a sustained period. For example, many investors believe that technology stocks are overvalued. They stay on the sidelines and miss investments opportunities in companies like Amazon or Tesla. In this section, we want to explore how one can spot value traps and how one can avoid them. The essay calls for defining and proposing new measures or ideas on how to assess value and growth stocks and how to define market environments that would be propitious to be in value stocks.
Similar to the investment project summary, the deliverable for this essay is a two-page write-up that will construct an argument in favor of an investment opinion. For example, this opinion could be as follows:
“Yes, we believe some value-oriented investors are in a value-trap and they have missed ten years of great investment opportunity in recent years after the credit crisis. We recommend that investors start increasing substantially their allocation to the technology and growth sectors of the economy.’’
All written reports for this project should be single-spaced and completed using appropriate report formatting. For additional direction on formatting, we refer you to the APA Style Manual available in the “Getting Started” section of Blackboard. All reports are limited to the length stated. Your write-up must include all necessary tables and charts in the body of the report, additional appendices that go beyond the length maximum are not allowed.
The goal is to be able to document that argument with data, and to be forward looking. While it is very difficult to predict the market, it is important to notice that you will write this essay as an investment advisor. Therefore, your potential clients expect you to have a view and defend that view. Otherwise they will not pay you an advisory fee. Below are some suggested steps that you could take to construct your argument. You are free to follow or not to follow these suggestions. As its name indicates, these are only suggestions. Nothing prevents you from constructing your essay in a totally different way.
Define an investment universe: That will allow you to focus on one index or investment pool. For example, the S&P 500 or NASDAQ or the Media sector.
Support your opinion with data: While this essay is more an opinion piece, it will be more convincing to your potential investors if you can demonstrate that you have studied the data and anchoring your view on solid data.
Construct a forward-looking opinion: As mentioned previously, we are trying to produce an opinion as close as possible to a practical and real-life investment advisory business. In this context, you need to clearly express a view and give clear guidance of investment advice with respect to the value trap idea
You will be evaluated on a scale of 1 to 5 for each of the following components of your essay for a total point value of 20 points.
· Format – Assignment parameters (length, subject, objectives) observed, clear and coherent focus (good sense of audience); orderly development of ideas; sentence fluency coherent, unified, varied; correct spelling, punctuation, capitalization; appropriate word choice.
· Insight alpha and risk assessment – provide substantive rational for your view on the validity or invalidity of the value trap proposition. Provide a clear explanation of how your view adds value, and how it is different from the prevailing wisdom. Determine the risk measures that are the most relevant for your proposition and estimate clearly all the downside risk measures associated with your view.
· Analytics – Clearly identify the source of data and the relevance of the data in the context of your essay. Provide a clear explanation, relevance and justification of the analytical models.
· Recommendation and Forecasting time horizon – provide clear recommendation and defend your view in a rational way. Provide a clear time-horizon for the validity of your value trap proposition. In other words, how long do you think your proposition will remain valid going forward?
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