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    Didlake, Inc.

    Index FundProspectus

    2005

    Matthew Erickson

    Jonathan HayDavid McDairmant

    Investments, Fall 2005Dr. Castro

    AdventuRisk vs. S&P

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    S&P 500

    AdventuRisk I

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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.

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    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.

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    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 Microsofts 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

    Sonys 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 Microsofts 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

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    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 andDecker 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%)

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    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 portfolios 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.

    BetaRisk FreeRate

    Expected MarketReturn

    ExpectedReturn

    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

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    5. High-low-close Charts and Basic Portfolio Statistics

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    Return variances, standard deviations and correlation of the portfolio are found in theattached Excel spreadsheet on Sheet6.

    7. Index

    DateAdj.Close*

    IndexAdj. S&P rr

    rate ofreturn

    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%

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    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%Totalreturn 2.92% 3.37%Anul.Return 17.18% 19.95%

    AdventuRisk vs. S&P

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    S&P 500

    AdventuRisk I

    8. Efficient Portfolio and minimum variance

    The charts and graphs are found on the attached Excel spreadsheet on Sheet6. Ourconclusions 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.

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    Efficient Trade-off Line and Efficient

    Frontier Curve

    -0.15

    -0.1

    -0.05

    0

    0.05

    0.1

    0.15

    0.2

    0.0% 10.0% 20.0% 30.0%

    Standard Deviation

    ExpectedReturn

    Serie

    Serie

    Serie