Investment Policy, Ethics, and Portfolio Management March 10, 2010 Mid-Term Problems Chapter 13 Question 1) Briefly describe the results of studies that examined the performance of alternative industries during specific time periods and discuss their implications for industry analysis. Industry analysis is performed and relevant because different industries have different performance over time periods and during different stages of the business cycle. Yearly performance studies have revealed that different industries have a wide range of rates of return.
In 2007, the stock market as a whole experienced a price change of about 3. 5% but yet the industry performance ranged from 83. 05% to -55. 86%.  These same studies have also found little correlation between industry performances on a year over year basis, so an industries prior performance does predict future performance. In short, what this data supports is sector rotation throughout the different phases of the business and economic cycle by shifting a portfolio to the sectors that perform best during that phase of the cycle.
Chapter 13 Question 4) Discuss the contention that differences in the performance of various firms within an industry limits the usefulness of industry analysis. One of the largest problems industry analysis alone faces is that firms within the industry may perform very differently. So simply performing industry analysis is insufficient. The competitive forces with in an industry as outlined by Michael Porter shows that the forces of the competitive field can affect different firms differently.
There is also many other factors that can affect a firms performance within in industry including its size, financial condition, management, and product portfolio. This really limits the usefulness of industry analysis but when it is combined with company analysis it can paint a much better picture. Taking both into account combining an attractive industry with a solid company should lead to better performance. Chapter 13 Question 16) Nelson Motors Product Life Cycle Part A) Each of Nelson Motors SUV’s is in different phases of the product life cycle.
The Raven is in the deceleration of growth and decline phase. The amount of Ravens being sold has steadily declined over 4 years and its profit has been rapidly declining for 5 years. The Raven is quickly becoming a dog. The Hawk is in the stabilization and maturity phase. The amount of Hawks being sold is slowly growing but yet its profit per unit is holding steady. It is currently a cash cow for Nelson Motors. Nelson’s Eagle is their star product; it is in the rapid growth phase.
Its sales are rapidly increasing, it’s per unit profit is above average, and its profit for the model is significantly increasing also. Nelson Motor’s is in very good shape with their product line up because of the different phases the products are in. Part B) An auto analyst states that “Nelson Motors has the best of both worlds because of increasing SUV profitability and declining expected future earnings volatility. ” Nelson Motors total SUV division profit has been steadily rising for the last 10 years mostly fueled by increasing sales.
It’s most current model the Eagle also currently has a very high profit per unit of $12,000 and the models sales are still growing. However they are also seeing profitability decline in their older model the Raven. For profitability to continue to rise they will have to divest the Raven and focus more on the Eagle and whatever new model comes after that. The company is currently fueling rising profitability through its SUV’s division so the analyst is correct on that point. However there is little evidence to support his second point of declining expected future earnings volatility.
Nelsons total profit has been rising but at different rates different years and without knowing the Ravens replacement or foresight into their next product launch it is hard to see future earnings. The launch of their next SUV is becoming increasingly important as the company is beginning to rely on heavily one SUV growth and profitability in particular reliance on the Eagle. Without another successful product launch their earnings could become more volatile as their current lineup moves through the product life cycle. ———————–