Didlake, Inc.

Index Fund
Prospectus

2005
Matthew Erickson
Jonathan Hay
David McDairmant

Investments, Fall 2005

Dr. Castro

AdventuRisk vs. S&P

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Introduction

The AdventuRisk co. High Growth Index is committed to returning consistent

high returns based on current market expectations. This index is an aggressively

managed index that uses a four month forecast to make trading decisions. A mixture of

stocks, bonds, and mutual funds is used to obtain high gains as well as a measure of

stability in returns.

This quarter, the AdventuRisk co. High Growth Index has taken positions in the

following stocks, bonds, and indexes.

AdventuRisk co. High Growth Index has taken a position in a number of corporate bonds.

Though bonds are usually considered low growth, these bonds have a fairly high return

that will be maintained even if the market takes an expected downturn in the next few

months. They add stability to the index as well maintaining aggressive growth.

Also, the index has invested in two high growth small-cap mutual funds. These

proven performers are expected to continue to post large gains even if the overall market

dips. Small-cap stocks often move independently of the overall market because their

price is based more on the performance of the individual companies. The chosen mutual

funds are well managed funds that are proven over time to produce a high return without

much risk.
 Over the duration of the portfolio, the market dropped in the first month, likely

because of high oil prices at the time. High oil prices caused the market to drop because

investor uncertainty caused prices to drop in the auto industry, as well as making the

airline industry less profitable. However, as oil prices decreased, money became more

liquid and the market strengthened at a fairly steady rate to its present value slightly

higher than the starting value. Our own portfolio followed this same general trend,

except for in weeks two and three, when news about oil affected stocks such as Exxon

and JetBlue sooner than the rest of the market, since these companies are in industries

more reactive to oil news. The rest of the market was less reactive, because such news

affects it less. In the last half of the period, we believe that anticipation of a good

Christmas season drove the value of the stock market higher, affecting our portfolio in

line with the market.

Over the duration of managing this portfolio, we learned many things that come

with first hand experience. One of the things we learned was the importance of beta as

regards to the risk of the portfolio. Another thing we learned that individual investors

tend to go with stocks they know, but this is not sufficient for managing a portfolio in an

efficient manner. Managing the portfolio involves a lot of analysis and requires a lot of

know how to beat the market. A better approach is usually diversifying the portfolio

across the entire portfolio using a market mutual fund to reduce risk and workloads.
 1. Ratio-Analysis of Microsoft

The stock we chose to analyze in depth was Microsoft. Microsoft is a large

company that dominates the software industry, making up more than half of the market

capitalization of the entire industry. In recent years, Microsoft has diversified its scope of

business, moving into the gaming industry, in addition to its business and personal

software interests. One of Microsoft’s competitors, Apple Computers, has moved in a

different direction by expanding its music services, becoming the leader in that area.

With the Xbox the recent release of the Xbox-360, Microsoft is directly competing with

Sony’s Playstation line of gaming systems. While Microsoft has yet to turn a profit in

this sector, it remains to be seen which company, or both, will win out in the end.

We mention the gaming interests of Microsoft because of the previously

mentioned release of the Xbox-360. The success of this system could make or break

Microsoft as a major player in the gaming industry. With the release of Windows Vista

still more than a year away, and other business and personal products not making any

major changes in the way Microsoft is doing business, we think the gaming sector to be

the primary stock value mover at the present time.

The following chart shows Microsoft’s key statistics compared to industry

averages.

Industry Microsoft
Market Capitalization 501B 296.45B
P/E 28.3 23.52
Price / Book 7.6 6.17
Net Profit Margin 20.80% 31.90%
Price To Free Cash Flow 80.7 71.97
ROE 19.50% 20.71%
Total Debt / Equity: 0 0
Dividend Yield 0.80% 1.10%

As can be seen from the chart, Microsoft has more than half of the market capitalization

of the industry, so it has a major effect on these key statistics. The P/E of Microsoft is

lower than the industry, indicating that it is not an aggressive growth stock. Microsoft

does have a higher net profit margin, probably due in part that it is one of the oldest

companies in this industry and is well-established. This higher profit margin allows

Microsoft to offer a higher dividend yield. The industry as a whole and Microsoft seems

to carry no debt, perhaps because the wipeout of many tech stocks a few years ago which

were piled sky-high with debt. The price to free cash flow indicates that Microsoft

indicates that it is likely to grow more slowly than other companies in the industry,

though it has less risk. Overall, these statistics reflect well how Microsoft is a well-

established company in a specialized industry, being highly profitable, but not likely to

have huge growth in the future.

2. Portfolio Summary Statistics

Stock P/E Price -to-book Beta Profit Margin Dividend yield

BOEING CO 24.41 5.99 1.04 4.26% 1.00 (1.40%)
Black and
Decker 12.56 4.44 1.09 8.88% 1.12 (1.30%)
CATERPILLAR INC 16.24 4.78 1.32 7.27% 1.00 (1.70%)
JetBlue 84.22 2.5 1.7 1.57% N/A
M B I A INC 11.93 1.29 1.15 32.85% 1.12 (1.80%)
MICROSOFT CP 23.66 6.14 0.85 31.90% 0.32 (1.10%)
MATRIX SERVICE
CO N/A 3.18 1.61 -8.11% N/A
OMNICARE INC 26.63 2.87 1.17 4.94% .09 (0.20%)
Oakley 20.92 2.73 1.55 8.24% .16 (1.00%)
PEPSICO INC 26.02 7.02 0.58 12.65% 1.04 (1.70%)
PROCTER GAMBLE
CO 21.07 10.5 0.69 12.71% 1.12 (1.90%)
WAL-MART
STORES 18.67 401.00% 0.74 3.54% 0.60 (1.20%)
EXXON MOBIL CP 11.14 3.42 1.08 10.67% 1.16 (2.00%)
3. Portfolio Beta and Risk

The calculated beta of the portfolio is 1.12. This indicates that our portfolio is

slightly more risky than the market. We also managed to have a slightly better return

over the period of the competition. The market over this period had an annualized return

of 17.18% while our portfolio’s annualized rate of return was 19.95%.

4. CAPM and Expected Returns

We identified the current risk free rate to be 4.71%, based on the 30-year T-bill.

The expected return of the S&P 500 over the past 5 years came out to be 3.33%.

However, since this calculation includes the years of a market recession and the historic

return is lower than the risk free rate, we could not use this for calculating expected

returns. Instead, a rough approximation of market returns has been historically 7%. We

believe that this is a acceptable assumption to make. Using the individual betas for each

stock and the CAPM model, we found the following expected returns.

Risk Free Expected Market Expected

Beta Rate Return Return
BA 1.6% 1.04 4.71 7.00% 7.0916
BDK 1.7% 1.09 4.71 7.00% 7.2061
CAT 2.5% 1.32 4.71 7.00% 7.7328
JBLU 0.3% 1.7 4.71 7.00% 8.603
MBI 0.6% 1.15 4.71 7.00% 7.3435
MSFT 0.5% 0.85 4.71 7.00% 6.6565
MTRX 3.5% 1.61 4.71 7.00% 8.3969
OCR 2.3% 1.17 4.71 7.00% 7.3893
OO 0.6% 1.55 4.71 7.00% 8.2595
PEP 0.5% 0.58 4.71 7.00% 6.0382
PG 0.9% 0.69 4.71 7.00% 6.2901
WMT -0.3% 0.74 4.71 7.00% 6.4046
XOM 1.5% 1.08 4.71 7.00% 7.1832
5. High-low-close Charts and Basic Portfolio Statistics
Return variances, standard deviations and correlation of the portfolio are found in the
attached Excel spreadsheet on Sheet6.

7. Index

Adj. Index rate of

Date Close* Adj. S&P rr return
26-Sep-05 1228.81 1200
3-Oct-05 1195.9 1185.138 -2.68% -1.24%
10-Oct-05 1186.57 1187.191 -0.78% 0.17%
17-Oct-05 1179.59 1148.258 -0.59% -3.28%
24-Oct-05 1198.41 1172.343 1.60% 2.10%
 31-Oct-05 1220.14 1197.529 1.81% 2.15%
7-Nov-05 1234.72 1210.336 1.19% 1.07%
14-Nov-05 1248.27 1230.031 1.10% 1.63%
21-Nov-05 1268.25 1246.306 1.60% 1.32%
28-Nov-05 1264.67 1240.479 -0.28% -0.47%

Avg. return 0.33% 0.38%

Std. dev. 31.88571 30.90073 1.51% 1.79%
Total
return 2.92% 3.37%
Anul.
Return 17.18% 19.95%

AdventuRisk vs. S&P

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8. Efficient Portfolio and minimum variance

The charts and graphs are found on the attached Excel spreadsheet on Sheet6. Our
conclusions show that the efficient portfolio has an efficient trade off line of 3.3% and a
minimum variance of 5.0%. The following chart shows the results in a return-variance
graph.
 Efficient Trade-off Line and Efficient
Frontier Curve

0.2
0.15
Expected Return

0.1
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Series2
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Series3
-0.050.0% 10.0% 20.0% 30.0%

-0.1
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Standard Deviation