Alex Sharpe

Executive Summary

Alex Sharpe needs to pick one stock: Reynold or Hasbro. The goal is to achieve adequate compensation for taking on extra risk. The decision will be based on IPS, risk profiles, and qualitative analysis.

Reynold enjoys huge market share in U.S. However, tobacco industry is trending downwards and is facing numerous litigations.

Hasbro has many successful products and brands. Revenue and operating profit have been growing continuously. However, Hasbro faces stiff competition and volatility of consumer preferences.

Reynold has higher return and higher standard deviation than Hasbro. However Hasbro’s higher beta means Hasbro’s performance will be more volatile.

Alex should add Reynold to her portfolio due to its lower volatility, reasonable risk profile, and the market leader position in tobacco industry.

Qualitative Analysis

Reynold

Reynold is required to spend millions of dollars annually on advertising to discourage tobacco consumption. The huge cash outflow can negatively affect the revenue. Exhibit 1 shows that the tobacco industry is experiencing declining demand among students and adults. This trend implies the revenue of tobacco firms will probably suffer in the future.

Reynold has been subject to significant litigation for decades, and the lawsuits will negatively affects the reputation and hence the firm’s stock price.

Nevertheless, Reynold is the second-largest tobacco firm in the world, enjoying 30% of the market share in U.S. The market leader position can be translated to steady revenue inflow, making it an attractive investment choice.

Hasbro

According to Hasbro’s 2006 annual report, Hasbro has been successfully introduced many innovative products such as Butter Scotch and Transformer that continuously contributed to the top-line growth.

However, Hasbro also face risks such as volatility of consumer preferences and the high level of competition, which makes it difficult to maintain...