alex and sharp ratio
1) Estimate and compare the returns and variability (i.e. annual standard deviation over the past five years) of Reynolds and Hasbro with that of the S&P 500 Index. Which stock appears to be riskiest?
2) Suppose Sharpe’s position had been 99 per cent of equity funds invested in the S&P 500 and either one per cent in Reynolds or one per cent in Hasbro. Estimate the resulting portfolio position. How does each stock affect the variability of the equity investment? How does this relate to your answer in question 1 above? (sharpe’s position)
3) Perform a regression of each stock’s monthly returns on the Index returns to compute a “beta” for each stock. How does this relate to your answer in question 2 above?
4) How might the expected return of each stock relate to its riskiness?
5) In what stock(s) (if any) should Sharpe invest?
Based on our calculation:
HSDr= 1.12% HSDh= 1.47% HSD500=1.02%
HRr= 0.105% HRh= 0.0792% HR500=0.0568%
Hasbro has the highest historical standard deviation over the pass five years
(25-Sep-09 to 24-Sep-14), which is 1.47%. Therefore, Hasbro appears to be the riskiest one of the three.
If investment is a portfolio combined with 99% in S&P500 and 1% in Reynolds or Hasbro, according to our calcuation:
Rpr=0.99*0.0568%+0.01*0.105%=0.0573%
Rph=0.99*0.0568%+0.01*0.0792%=0.057024%
The portfolio return combined with S&P500 and Reynolds is higher, which is 0.0573%. Therefore, recommending portfolio with Reynolds is more variable to the equity investment positively. In mean time, it can be found in early statement that the standard deviation of Reynolds is lower, so the investment on reynolds is less risky as well.
Our calculation result of Betas:
r= 0.618
h= 0.839
Both betas are less that 1, so both stock are less volatile than the market. Beta of Reynolds is lower and it matches the our conclusion above.
In terms of our calculation
2) Suppose Sharpe’s position had been 99 per cent of equity funds invested in the S&P 500 and either one per cent in Reynolds or one per cent in Hasbro. Estimate the resulting portfolio position. How does each stock affect the variability of the equity investment? How does this relate to your answer in question 1 above? (sharpe’s position)
3) Perform a regression of each stock’s monthly returns on the Index returns to compute a “beta” for each stock. How does this relate to your answer in question 2 above?
4) How might the expected return of each stock relate to its riskiness?
5) In what stock(s) (if any) should Sharpe invest?
Based on our calculation:
HSDr= 1.12% HSDh= 1.47% HSD500=1.02%
HRr= 0.105% HRh= 0.0792% HR500=0.0568%
Hasbro has the highest historical standard deviation over the pass five years
(25-Sep-09 to 24-Sep-14), which is 1.47%. Therefore, Hasbro appears to be the riskiest one of the three.
If investment is a portfolio combined with 99% in S&P500 and 1% in Reynolds or Hasbro, according to our calcuation:
Rpr=0.99*0.0568%+0.01*0.105%=0.0573%
Rph=0.99*0.0568%+0.01*0.0792%=0.057024%
The portfolio return combined with S&P500 and Reynolds is higher, which is 0.0573%. Therefore, recommending portfolio with Reynolds is more variable to the equity investment positively. In mean time, it can be found in early statement that the standard deviation of Reynolds is lower, so the investment on reynolds is less risky as well.
Our calculation result of Betas:
r= 0.618
h= 0.839
Both betas are less that 1, so both stock are less volatile than the market. Beta of Reynolds is lower and it matches the our conclusion above.
In terms of our calculation