We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Alex Sharpe

essay
The whole doc is available only for registered users OPEN DOC

A limited time offer! Get a custom sample essay written according to your requirements urgent 3h delivery guaranteed

Order Now

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
65.866763
Standard Deviation
3.601713
9.366458
8.115834

Answer 2.
At individual stock level, Reynolds fluctuates more than Hasboro as it has higher Standard Deviation and higher variance. After calculating the portfolio of both the stocks, it gives us a different picture. Looking at the numbers at portfolio level, Portfolio A which constitutes Reynolds still has a higher return(.587) but at a lower standard deviation (3.59) and variance (12.9), compared to Hasbro. This means that Reynolds when combined with S&P 500 is giving a higher return at the portfolio level but with a lower standard deviation and a lower variance when compared with the portfolio of S&P & Hasbro. It also means Reynolds is less risky than Hasbro when combined in a portfolio. Portfolio B (S&P+Hasboro) in this case seems more volatile than Portfolio A(S&P + Reynolds).We can also say that the variance which is measuring the risk involved was reduced by combining the stock in a portfolio.

Portfolio A (.99 S&P + .01 Reynolds)
Portfolio B (.99 S&P + .01 HASBRO)
Mean/Average
0.587338
0.580428
Variance
12.911939
13.085449
Standard Deviation
3.593319
3.617382

Answer 3.
Reynolds Beta =.7358 Hasbro Beta 1.4198
Calculating the Beta, Hasbro’s beta is more than 1, which means it’s more volatile than the market. We can also say its 42% more volatile than the market. Higher beta also offers a possibility of a higher rate of return but also with higher risk. Reynolds has a beta of .74, which means is less volatile than the market.

Portfolio A (S&P + Reynolds) Beta = .9974 Portfolio B (S&P + Hasbro) Beta = 1.0042 When we add the stocks of Reynolds and Hasbro to the portfolio, the Beta changes to almost similar or close to market. Basically, we can see that having a stock in a portfolio is better here as stock like Reynolds, which was moving less than the market is now very close to the market movement at .9974. Furthermore, Hasbro which was moving above the market level is now moving almost with the market at 1.0042. *Please see the attached excel file for calculations.

Answer 4.
We can’t figure out the riskiness of the stock by just looking at the expected return. In the case of individual stock, Reynolds at 1.87 is giving a higher return compared to Hasbro at 1.18. We wouldn’t know the riskiness unless we look at the standard deviation or the variance of the stock. By comparing the two, Reynolds has a higher variance and standard deviation and will be more risky. When combined with portfolio, we see the variance has changed. Reynolds, which was more risky with higher variance individually, when combined with portfolio, has a lower variance than Hasbro. On the other hand, Hasbro, which had considerably less return and variance individually, when combined in a portfolio, has more volatility, hence becoming more risky.

Answer 5.
Alex Sharpe should invest in Portfolio A, consisting of Reynolds and S&P500. Portfolio A gives higher return with lower risk. The standard deviation and the variance are both lower for portfolio A which means Alex Sharpe will get better returns at a much lower risk as compared to Portfolio B.

Related Topics

We can write a custom essay

According to Your Specific Requirements

Order an essay
Get Access To The Full Essay
icon
300+
Materials Daily
icon
100,000+ Subjects
2000+ Topics
icon
Free Plagiarism
Checker
icon
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access
immediately?

Become a member

Your Answer Is Very Helpful For Us
Thank You A Lot!

logo

Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?

Get access to our huge, continuously updated knowledge base

The next update will be in:
14 : 59 : 59
Become a Member