Case Analysis 1 (Case--Darden) Accounting, Finance, SPSS Case Study

Case Analysis 1 (Case--Darden)- The Cavalier Fund
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Please find below the list of questions that you should think about for the Darden case. An Excel sheet with the relevant data from the case is attached.
1. Which stock do you believe provides the most attractive investment opportunity for the Cavalier Fund? Why?
 

Annual

Annualized

 

Average

Std. Dev

Delphi

24.8%

24.8%

Groupon

-9.8%

67.3%

Kellogg

11.4%

14.6%

Kinross Gold

-2.0%

65.0%

 

Anticipated Annual Return

Delphi

9.1%

Groupon

9.3%

Kellogg

4.6%

Kinross Gold

8.4%

Source: Darden Capital Management: The Cavalier Fund by Michael
Based on the average annual returns for proposed stocks, for the period January 2012 to March 2017, I would choose the Delphi where the annual average return was 24.8%. This was higher than that for the S&P 500. Delphi’s anticipated annual return is 9.1%. Groupon and Kinross Gold had negative average returns of -9.8% and -2.0%, and Delphi’s stock also less volatile than these two stocks (Schill, 2018). The Groupon, Kellogg, and Kinross Gold stocks performed worse than the S &P 500, based on the annual average. Furthermore, the bond rating for Delphi was Baa2, which is a medium grade, but for Kinross Gold, the rating was Ba1 and reflects that it is speculative and there is a substantial credit risk. Ba1 is also associated with significant debt and higher leverage than Baa2. Both Groupon and Kinross Gold have a dividend yield of 0.00%.
2. How would you characterize the riskiness of the different stocks being considered by the Cavalier Fund? Which stock do you believe is the most risky and which is the least risky?
Groupon is the riskiest stock where the annualized standard deviation is 67.3%, this is followed by Kinross Gold where the standard deviation is 65.0% and Delphi is at 24.8%. The least risky stock is Kellogg with an annualized standard deviation of 14.6%, but still above the S & P 500. Risk represents the probability distribution of the expected future returns. The standard deviation represents volatility and is a good measure of risk since a tight. Probability distribution shows that the stock is less risky. At the same time, the bigger the variation from a stock’s average return, the higher the volatility of that stock, which implies that as the standard deviation, increases a stock, becomes riskier. 3. How does portfolio diversification affect your characterization of risk for the stocks? Kramer argues that the returns associated with a 50-50 weighted portfolio of Groupon and Kinross Gold have a lower standard deviation than those associated with either Groupon or Kinross Gold stock alone. Is that true
Portfolio diversifi...