Case1: Alex Sharpe
Portfolio Management
Case 1: Alex Sharpe’s Portfolio
Executive Summary
As Alex Sharpe’s consultant, we recommend a portfolio of 78% S&P 500 and 22% of R.J Reynolds.
This portfolio will generate an annual expected return of 8.86% (significantly higher than the index return 6.29%), while the risk increases by only less than 10%.
In Qualitative Analysis, we find that tobacco industry tends to move with the market less than the toy industry, which indicates that R.J Reynolds can diversity the risk of the original portfolio better. In Quantitative Analysis, we first use Treynor Measure as the ranking criteria and find R.J
Reynolds a better choice. Then we employ the Markowitz Mean-Variance Analysis to plot the efficient frontier and construct strategy set. Combined with Alex Sharpe’s risk profile, we find the optimal strategy.
For years, Alex Sharpe has been investing her children’s educational savings in the V anguard Index
Fund which tracked the performance of S&P 500. However, in order to achieve higher returns, she tries to accomplish a more active strategy by adding one of the two companies’ stocks to the
V
anguard Index:
R.J Reynolds Tobacco Company, the second-largest tobacco firm in the world.
Hasbro, an American toy and game company the second-largest toy maker in the world.
To decide which stock to choose and how much weight she should put in each stock, we have to start with Alex Sharpe’s IPS.
Policy Statement
As a conservative investor, Alex Sharpe wants to maximize the excess return for taking on any new risk. After new risky assets are added in, the risk of portfolio should increase by less than 10%.
Annual expected returns are supposed to be higher than 6.29% (the expected return of S&P 500) to create a capital appreciation in a long (5-10 years) time horizon.
Another two points should be emphasized:
Liquidity needs & Time Horizon: Since Alex Sharpe is going to build an education fund, shortterm income is
Case 1: Alex Sharpe’s Portfolio
Executive Summary
As Alex Sharpe’s consultant, we recommend a portfolio of 78% S&P 500 and 22% of R.J Reynolds.
This portfolio will generate an annual expected return of 8.86% (significantly higher than the index return 6.29%), while the risk increases by only less than 10%.
In Qualitative Analysis, we find that tobacco industry tends to move with the market less than the toy industry, which indicates that R.J Reynolds can diversity the risk of the original portfolio better. In Quantitative Analysis, we first use Treynor Measure as the ranking criteria and find R.J
Reynolds a better choice. Then we employ the Markowitz Mean-Variance Analysis to plot the efficient frontier and construct strategy set. Combined with Alex Sharpe’s risk profile, we find the optimal strategy.
For years, Alex Sharpe has been investing her children’s educational savings in the V anguard Index
Fund which tracked the performance of S&P 500. However, in order to achieve higher returns, she tries to accomplish a more active strategy by adding one of the two companies’ stocks to the
V
anguard Index:
R.J Reynolds Tobacco Company, the second-largest tobacco firm in the world.
Hasbro, an American toy and game company the second-largest toy maker in the world.
To decide which stock to choose and how much weight she should put in each stock, we have to start with Alex Sharpe’s IPS.
Policy Statement
As a conservative investor, Alex Sharpe wants to maximize the excess return for taking on any new risk. After new risky assets are added in, the risk of portfolio should increase by less than 10%.
Annual expected returns are supposed to be higher than 6.29% (the expected return of S&P 500) to create a capital appreciation in a long (5-10 years) time horizon.
Another two points should be emphasized:
Liquidity needs & Time Horizon: Since Alex Sharpe is going to build an education fund, shortterm income is