Marriott

Case Questions

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?

Monthly Deviation

S & P Reynolds Hasbro

0.036 0.093 0.079

Annualized Std Deviation = monthly deviation * 3.46 ( that is square root of 12)

S & P Reynolds Hasbro

0.12456 0.32178 0.27334

Reynolds is riskier as std deviation .093 is higher than that of Hasbro deviation of .079

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?

ER of .99S&P+.01Reynolds = 0.005873383

SD of .99S&P+.01Reynolds = 0.035933187

ER of .99S&P+.01Hasbro = 0.005886317

SD of .99S&P+.01Hasbro = 0.036206593

In this case the SD of Hasbro is higher and that makes it the riskier stock.

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?

Beta Reynolds_to_S&P = 0.735763036

Beta Hasbro_to_S&P = 1.513199939

In this case the Beta higher than 1 means Hasbro is a riskier stock and it matches to my answer in question 2.

4. How might the expected return of each stock relate to its riskiness?

The higher the risk must equate to higher returns but as you can see from the return in my answer to 2 the returns for both stocks are similar but Hasbro has higher risk compared to Reynolds.

5. In what stock(s) (if any) should Sharpe invest?

None of the two stocks. Better to invest in S&P index fund.