Mr White is the CFO of a $46 million revenue service company. He has excess funds to invest in a stock and is interested in Starbuck Company. According to him, the stock is an excellent choice because it has a current stock beta of 0.64 which indicates that the risk is lower than the threshold of 1.00. Mr White would like to use VAR to quantify the downside as well as the upside risk to the company to determine whether Starbuck is a good option. The VAR calculations will enhance Mr White's ability to make an informed decision whether to buy Starbuck stocks or if it is appropriate to invest in another stock. The following section is a calculation of the VAR and a final recommendation to Mr White.
| Date | Stock Closing | Monthly | Monthly |
| Month | Value | $ Variance | % Variance |
| 6/1/2012 | 26.66 | 4.02 | -17.76% |
| 7/1/2012 | 22.639999 | (2.17) | 8.73% |
| 8/1/2012 | 24.805 | (0.55) | 2.17% |
| 9/1/2012 | 25.355 | 2.40 | -10.48% |
| 10/1/2012 | 22.950001 | (2.98) | 11.51% |
| 11/1/2012 | 25.934999 | (0.88) | 3.28% |
| 12/1/2012 | 26.815001 | (1.24) | 4.44% |
| 1/1/2013 | 28.059999 | 0.64 | -2.32% |
| 2/1/2013 | 27.424999 | (1.05) | 3.69% |
| 3/1/2013 | 28.475 | (1.95) | 6.39% |
| 4/1/2013 | 30.42 | (1.15) | 3.64% |
| 5/1/2013 | 31.57 | (1.19) | 3.62% |
| 6/1/2013 | 32.755001 | (2.89) | 8.11% |
| 7/1/2013 | 35.645 | 0.39 | -1.09% |
| 8/1/2013 | 35.259998 | (3.23) | 8.38% |
| 9/1/2013 | 38.485001 | (2.04) | 5.03% |
| 10/1/2013 | 40.525002 | (0.20) | 0.50% |
| 11/1/2013 | 40.73 | 1.54 | -3.92% |
| 12/1/2013 | 39.195 | 3.63 | -10.22% |
| 1/1/2014 | 35.560001 | 0.08 | -0.23% |
| 2/1/2014 | 35.48 | (1.21) | 3.30% |
| 3/1/2014 | 36.689999 | 1.38 | -3.91% |
| 4/1/2014 | 35.310001 | (1.31) | 3.58% |
| 5/1/2014 | 36.619999 | (2.07) | 5.35% |
| 6/1/2014 | 38.689999 | (0.15) | 0.39% |
| 7/1/2014 | 38.84 | (0.06) | 0.17% |
| 8/1/2014 | 38.904999 | 1.17 | -3.11% |
| 9/1/2014 | 37.73 | (0.05) | 0.13% |
| 10/1/2014 | 37.779999 | (2.83) | 6.96% |
| 11/1/2014 | 40.605 | (0.42) | 1.02% |
| 12/1/2014 | 41.025002 | (2.74) | 6.26% |
| 1/1/2015 | 43.764999 | (2.98) | 6.38% |
| 2/1/2015 | 46.744999 | (0.60) | 1.28% |
| 3/1/2015 | 47.349998 | (2.23) | 4.50% |
| 4/1/2015 | 49.580002 | (2.38) | 4.58% |
| 5/1/2015 | 51.959999 | (1.66) | 3.10% |
| 6/1/2015 | 53.619999 | (4.31) | 7.44% |
| 7/1/2015 | 57.93 | 1.98 | -3.54% |
| 8/1/2015 | 55.950001 | (0.89) | 1.57% |
| 9/1/2015 | 56.84 | (5.73) | 9.16% |
| 10/1/2015 | 62.57 | 1.18 | -1.92% |
| 11/1/2015 | 61.389999 | 1.36 | -2.27% |
| 12/1/2015 | 60.029999 | (0.74) | 1.22% |
| 1/1/2016 | 60.77 | 2.56 | -4.40% |
| 2/1/2016 | 58.209999 | (1.49) | 2.50% |
| 3/1/2016 | 59.700001 | 3.47 | -6.17% |
| 4/1/2016 | 56.23 | 1.34 | -2.44% |
| 5/1/2016 | 54.889999 | (2.23) | 3.90% |
| 6/1/2016 | 57.119999 | (0.93) | 1.60% |
| 7/1/2016 | 58.049999 | 1.82 | -3.24% |
| 8/1/2016 | 56.23 | 2.09 | -3.86% |
| 9/1/2016 | 54.139999 | 1.07 | -2.02% |
| 10/1/2016 | 53.07 | (4.90) | 8.45% |
| 11/1/2016 | 57.970001 | 2.45 | -4.41% |
| 12/1/2016 | 55.52 | 0.30 | -0.54% |
| 1/1/2017 | 55.220001 | (1.65) | 2.90% |
| 2/1/2017 | 56.869999 | (1.52) | 2.60% |
| 3/1/2017 | 58.389999 | (1.67) | 2.78% |
| 4/1/2017 | 60.060001 | (3.55) | 5.58% |
| 5/1/2017 | 63.610001 | 63.61 | #DIV/0! |
| 0.00 | #DIV/0! |
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According to the monthly variances, Starbuck stock shows significant signs of volatility. The calculations show that the stock moves from high to low with some months showing higher volatility than others. The data indicates that the investors can gain or lose their investment if the value of the stock suddenly declines. The above graph shows that the stock is affected by seasonal variations. A clear example was 2012 and 2013 when the stock showed positive outcomes. 2015 and 2016 show that the performance of the stock was not impressive but the trend change in later 2016 and 2017.
| Starbucks VaR Calculation | |
| Parameters | |
| Portfolio Value | $188,500 |
| Average Return | 13.40% |
| Standard Deviation | 10.00% |
| Confidence Level | 95.00% |
| Calculations | |
| Min Return with 95% prob | -3.049% |
| Value of Portfolio | $182,754 |
| Value at Risk | $5,746 |
Starbuck VAR calculations show that the there is a 95% confidence that the stock will not lose more than 3.049% in the worst case scenario. The estimates show that if Mr White invested $188,500, in the stock he there is a 95% probability that he will only lose $5,746. It implies therefore that Mr, White is 95% confident that in the worst case scenario, his portfolio will reduce by $5,746.
A risk-averse investor can be tempted to sell the stock if it reports a significant drop. Such decisions are driven by the desire to mitigate against further loses if the stock keeps on losing its value. However, a sudden increase in the value of a stock encourages more investors to buy additional shares to benefit from the high returns. A decision to dispose of a stock because it is losing its value is short-sighted since the trend is expected to reverse and the stock will start to report impressive performance. The Starbuck stock has continued to report mixed signals including addition and a decline in the value, declines in the share have been followed by an increase in its value implying that long-term investors have benefited from a high return on investment (Harper, 2018). The VAR calculations also show that an investor is unlikely to lose a substantial amount in the event of a decline in the stock value.
Mr White decision to choose Starbuck was motivated by the company’s past performance and the current stock beta that is lower than the threshold which is 1.00. The stock performance, therefore, shows that the company is less risk compared to other stocks. Similarly, the volatility recorded in the historical data can only be attributed to the average trading patterns and seasonal changes that affect all stocks (Harper, 2018). The historical information also shows that the stock is influenced by other factors like dividends that increase the stock price if the investors are aware that dividends will be paid.
Recommendations
Different stocks Starbuck included have continued to report increased volatility. Invest.ors are therefore worried about the returns of their investments. Some of the investors are trying to devise approaches that will protect their investments. Some are willing to forego the gains made by the stocks in exchange for safety. Investors are therefore opting to invest in short-term investments because the volatility in the market no longer guarantees higher returns In future. Similarly, a decline in the stock price can erode historical gains.
Mr White should select a portfolio of high performing stocks from different industries for .investment purposes. Such a collection will ensure that he is not adversely affected by a sudden decline in the value of one stock because the value of all shares cannot go down at the same time. Similarly, Mr White should identify companies with growth fundamentals and will guarantee high returns in the short and long term. However, he should not drop the Starbuck stock in favour of other companies that promise higher returns.
References
Harper, D. (2018). An Introduction to Value at Risk (VAR). Retrieved from https://www.investopedia.com/articles/04/092904.asp?lgl=rira-baseline-vertical
Holton, G. (2010). Value-at-risk . Boca Raton, Fla.: Chapman & Hall/CRC.
Invest Excel. (2018). Value at Risk - Methods and Free Spreadsheets. Retrieved from http://investexcel.net/value-at-risk-methods-spreadsheets/
The 'New' Market Volatility: How to Handle it. (2018). Retrieved from https://www.thestreet.com/investing/stocks/how-to-handle-market-volatility-14638447
Yahoo finance. (2018). Starbucks Corporation. Retrieved from https://finance.yahoo.com/quote/SBUX/financials?p=SBUX
