Alex Sharpe Assignment – T. Jabran Answer 1. By comparing both the stocks‚ the riskiest stock in this case is Reynolds. It has the highest return as well as higher standard deviation and the higher variance. If we compare both stocks‚ Reynolds is riskier than Hasbro in this case. The higher variance indicates higher chance that the actual return on Reynolds will deviate from the expected return. S&P 500 REYNOLDS HASBRO Mean/Average 0.574333 1.874833 1.183833 Variance 12.972333 87.730541 65
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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
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The Capital Asset Pricing Model commonly known as CAPM defines the relationship between risk and the return for individual securities. CAPM was first published by William Sharpe in 1964. CAPM extended “Harry Markowitz’s portfolio theory” to include the notions of specific and systematic risk. CAPM is a very useful tool that has enabled financial analysts or the independent investors to evaluate the risk of a specific investment while at the same time setting a specific rate of return with respect
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estimated to testify that the CAPM works in practice. The capital asset pricing model (CAPM) provides us with an insight into the relationship between the risk of an asset and its expected return. This relationship serves two significant functions. First‚ it provides a benchmark rate of return for evaluating possible investments. Second‚ the model helps us to make an educated guess as to the expected return on asset that have not yet been traded in the marketplace. Although the CAPM is widely used because
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pricing model (CAPM) Using the Capital Asset Pricing Model‚ we need to keep three things in mind. 1 there is a basic reward for waiting‚ the risk free rate. 2 the greater the risk‚ the greater the expected reward. 3 there is a consisted trade off between risk and reward. In finance‚ It is used to determine a theoretically appropriate required rate of return of an asset‚ if that asset is to be added to an already well-diversified portfolio‚ given that asset’s non-diversifiable risk. The CAPM says that
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ECON 405: Quantitative Finance CAPM and APT In this document‚ I use the package ”gmm”. You can get it the usual way through R or though the development website RForge for a more recent version. For the latter‚ you can install it by typing the following in R: > install.packages("gmm"‚ repos="http://R-Forge.R-project.org") The data I use come with the package and can be extracted as follows: > > > > library(gmm) data(Finance) R > > > > Rm F) 0.70956 0.70956 0.70956 0.70956 They use a particular
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CAPM CAPM provides a framework for measuring the systematic risk of an individual security and relate it to the systematic risk of a well-diversified portfolio. The risk of individual securities is measured by β (beta). Thus‚ the equation for security market line (SML) is: E(Rj) = Rf + [E(Rm) – Rf] βj (Equation 1) Where E(Rj) is the expected return on security j‚ Rf the risk-free rate of interest‚ Rm the expected return on the market portfolio and βj the undiversifiable risk of security
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CAPM 1 Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11. 2 Calculate the expected return for B Services which has a beta of 0.83 when the risk free rate is 0.05 and you expect the market return to be 0.12. 3 Calculate the expected return for C Inc. which has a beta of 0.8 when the risk free rate is 0.04 and you expect the market return to be 0.12. 4 Calculate the expected return for D Industries
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The Capital Asset Pricing Model (CAPM): What Is It? How Does It Work? And Does It Work Effectively? In 1960‚ a doctoral candidate in economics at the University of California‚ Los Angeles by the name of William F. Sharpe needed a dissertation topic. After reading a 1952 paper on portfolio theory by Harry Markowitz entitled Portfolio Selection‚ Sharpe had found his idea. Markowitz ’s paper presented the notion of an "efficient frontier" of optimal investment that advocated a diversified portfolio
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