MEMORANDUM

DATE: March 10, 2023

TO: Professor Mark M. Westerfield
FROM: Group 4: Aidan Grambihler, Jeremy Liss, Elda Theodros, Jenna Williams, Anabella Wren
SUBJECT: Stock Case write-up
SUPPORTING DOCUMENT:Stock Case Price Tracker FIN 350

At the beginning of the quarter, we decided to invest $100,000 equally between Hershey (HSY),
Block (SQ), MercadoLibre (MELI), and Chipotle (CMG). Using the Vanguard S&P 500 to represent the
market, we can determine that our portfolio was significantly riskier than the market as a whole.
Referring to Row 11 on the “Required Table” sheet (linked above), the average monthly return for our
portfolio was 1.13% while VFINX had a return of .05%. In class, we learned that stocks with higher
returns come with higher risk, a lesson we can apply to this scenario. Additionally, the standard deviation
of returns for our portfolio (Row 12, “Required Table”) was 3.94% whereas it was only 2.43% for the
Vanguard S&P 500. This means the returns deviated from this average by more in our portfolio than in
the S&P’s. This makes sense regardless of the stocks we chose based on the fact that our portfolio only
contains four stocks while the S&P has 500. Diversification is a risk mitigation strategy that investors use
by spreading their money into many stocks in hopes that a change in one will be offset by changes in
another. As VFINX is a much more diversified portfolio, ours is more vulnerable to volatility in the
market and is therefore riskier.
This makes sense as our portfolio had a higher expected return. Despite being riskier, our
portfolio's diversification helped to keep the risk relatively low by including two food stocks and two
technology stocks, which were correlated in a way that allowed for some diversifiable risk to be
eliminated. MELI, a Latin American-based company, is considered riskier than the global equity fund
VHGEX due to its narrower focus on a single company and stronger correlation to the broader market.
Also, SQ stock is riskier than QQQ, an exchange-traded fund that tracks the performance of the Nasdaq
100 index. The reason for this is that SQ's business focuses on a narrow subset of the technology industry,
which may result in higher volatility and fluctuations in its performance compared to the more diversified
QQQ. HSY is a historically stable and profitable company but is still subject to risks such as dependence
on consumer discretionary spending and commodity prices. Lastly, while CMG was expected to thrive,
concerns about increasing labor costs caused our returns to decrease (Glascock/Bloomberg). Given these
considerations, it is understandable that our stock portfolio exhibited a higher level of risk than the
market. The increased risk is mainly due to our portfolio consisting of only four stocks, which is a much
smaller number of holdings than the market portfolio, allowing for less diversification and potentially
greater volatility.
Volatility is a statistical measure of the dispersion of data. In this case, it measures the dispersion
of market prices. An asset’s own variability can be divided into two different types of risk. The first is a
non-diversifiable risk, also known as systematic risk, which cannot be eliminated through diversification
because of an event that systematically affects all stocks. Examples of this include inflation risk, general
political risk, or business cycle risks. This type of risk is typically compensated through higher expected
returns. The other is a diversifiable risk, also known as unsystematic risk, which is a risk that can be
removed by opposite/uncorrelated events occurring to companies in the same portfolio. Examples of this
are supplier-specific shortages, specific regulations, technology or product success/failure, and/or
management news. This type of risk is not compensated since it can be eliminated through diversification.
An example of this specific to our observed companies is Hershey (HSY) management’s response to
backlash over their recent International Women’s Day Campaign that included a trans woman. Critics
called out a boycott for Hershey stating “#BoycottHersheys.” However, the company stood by its
decision by announcing that it values togetherness and diversity (Burga). This is an example of
unsystematic risk because it is specific to the company and would not affect an investor’s entire portfolio.
Our portfolio did better than the broader market. Over the eight-week period, the individual
stocks in our portfolio performed as follows: HSY’s value went up by $1,296.90, SQ’s by $3,212.04,
MELI’s by $3,307.86, and Chipotle lost $233.12 (Row 15, “Individual Stock Returns”). Together our
portfolio grew by $7,583.68. Dividing this by the starting value of our portfolio, $99,161.58 (E3,
“Required Table”), we find that our portfolio had an overall return of 7.648%. Our average weekly
portfolio return was 1.13% (F11, “Required Table”). The average weekly return for VFINX over the
eight-week period was 0.05%. Using VFINX as a proxy for the overall market, comparing the 1.13% and
0.05% figures suggests that our portfolio had a better return than the market.
The multiples and metrics match our intuition for the stocks. We assumed the tech companies
would be riskier than CMG or HSY, having higher returns when doing well, and worse losses when doing
poorly. This is supported by the beta values, which are used as a measure of risk for each company. SQ’s
beta value is 2.33 and MELI’s is 1.58 whereas CMG’s beta value is 1.28 and HSY’s is 0.35 (Row 18,
“Individual Stock Data”). Since a beta above 1.0 signifies more volatility than the broader market, the
tech companies are clearly more volatile than the food companies, matching our original thought process.
The first metric our team noticed was that SQ’s P/E Ratio is a negative value of -80.88 as of
March 3rd, which surprised us since we were expecting to see positive P/E Ratios. Upon further analysis,
however, SQ’s negative P/E ratio makes sense in the context of current events. SQ’s acquisition of
CashApp finalized in 2022 and its acquisition of Afterpay also finalized in 2021 (“Square, Inc..
Announces”). With these recent acquisitions, SQ is investing heavily into projects, spending more money
than it is gaining. The high multiples (even when negative) signify high and rapid growth. This does not
mean that SQ is a “good” or “bad” investment. It just means that it is a growth stock and could yield high
profit in the future.
Next, when looking at multiples for the three other companies we invested in, we noticed that the
P/E ratio for MELI (128.19) is significantly higher than the P/E Ratios for HSY or CMG. MELI’s higher
P/E ratio indicates that it pays more for every dollar of earnings received. This matches our expectations
given that MELI is in the tech industry, which is a more volatile and high growth industry. This is similar
to SQ’s high negative range, just in the opposite direction. CMG’s P/E ratio (46.52) was slightly higher
than expected because it is slightly higher than the standard of around 20-30. This also indicates growth,
just not as rapid or drastic as the tech companies within our portfolio. HSY on the other hand has a
comfortable and expected ratio (29.76). This indicates that HSY is more of a value stock, and a safe long
term investment with relatively low risk. This makes perfect sense given HSY’s history and well-
established, stable stance in its industry.
Our main takeaway from this exercise was that diversification makes a big difference in the value
of a portfolio. Our portfolio’s overall return was 7.65% (A23, “Individual Stock Returns”). However, had
we just invested in HSY or CMG, our return for the eight-week period would have been 5.20% or -
0.96%, respectively (Row 17, “Individual Stock Returns”). While we would have seen higher returns by
just investing in SQ or MELI, the risk would have been greater (Row 21, “Individual Stock Returns”). As
young people new to investing, it is important we understand fundamental investing concepts like these in
order to manage our money wisely and avoid losing everything to one stock.
 Works Cited
Glascock/Bloomberg, Taylor. “Chipotle Profit Hit by Higher Labor Costs.” The Wall Street Journal, Dow
Jones & Company, 7 Feb. 2023, https://www.wsj.com/articles/chipotle-fourth-quarter-
revenue-rises-with-more-store-openings-11675809367.
Burga, Solcyre. “Hershey Faces Boycott Calls Over Trans Woman in International Women's Day
Campaign.” Yahoo! Finance, Yahoo!, 2 Mar. 2023, https://finance.yahoo.com/news/hershey-
faces-boycott-calls-over-222034271.html
“Square, Inc.. Announces Plans to Acquire Afterpay, Strengthening and Enabling Further Integration
between Its Seller and Cash App Ecosystems.” SquareUp, 2021,
https://squareup.com/us/en/press/square-announces-plans-to-acquire-afterpay