Focus: Strategic issues in risk return tradeoff relation, beta estimation, portfolio management, market efficiency, and market timing. Assignment Questions

1 Discuss the strategy and goals of Alex Sharpe and relate them to the efficient market hypothesis.

2 Calculate the return and variability (standard deviation) of Reynolds, Hasbro, and Vanguard Index 500 Trust during the past 5 years. Which one appears to be riskiest?

S&P 500

REYNOLDS

HASBRO

Mean

0.57%

1.87%

1.18%

Variance

0.13%

0.88%

0.66%

Standard Deviation

3.60%

9.37%

8.12%

Conclusion:

Reynolds appears to be riskiest.

Explanation:

Given the fact that risk reflects the uncertainty of future return on a given asset or a portfolio of assets, standard deviation is thus used as a measure of the risk for the reason that it examines the historical price fluctuations of the underlying assets. Hence, the higher standard deviation,

the higher risk the asset bears. Based on the calculation, Reynolds is riskiest because it has the highest standard deviation.

3 Suppose Sharpes position had been 99% of equity funds invested in the index fund, and 1% in the individual stock. Calculate the return and variability of each portfolio using each stock. How does each stock affect the return and variability of the equity investment? Which portfolio is riskiest? How does this relate to your answer to question 2?

S&P 500

Portfolio #1

S&P500 and Reynolds

Portfolio #2

S&P500 and Hasbro

Mean

0.57%

0.59%

0.58%

Variance

0.13%

0.13%

0.13%

Standard Deviation

3.60%

3.59%

3.62%

Effect on the initial equity investment:

Portfolio #1: Higher expected return, lower variability

Portfolio #2: Higher expected return, higher variability

Conclusion:

Per the answer of question 2, portfolio #2 is the riskiest for the reason that it has the highest standard deviation.

4 Perform a regression of each stocks monthly returns on the Index returns to compute the beta for each stock. How does this relate to the situation described in question 2 above? In what stock(s) (if any) should Sharpe invest? How might the expected return for each stock relate to its riskiness?

5 What would be your (i) goal and (ii) strategy if you are the portfolio manager? Please provide a reasonable analysis to support your goal and strategy.a

1 Discuss the strategy and goals of Alex Sharpe and relate them to the efficient market hypothesis.

2 Calculate the return and variability (standard deviation) of Reynolds, Hasbro, and Vanguard Index 500 Trust during the past 5 years. Which one appears to be riskiest?

S&P 500

REYNOLDS

HASBRO

Mean

0.57%

1.87%

1.18%

Variance

0.13%

0.88%

0.66%

Standard Deviation

3.60%

9.37%

8.12%

Conclusion:

Reynolds appears to be riskiest.

Explanation:

Given the fact that risk reflects the uncertainty of future return on a given asset or a portfolio of assets, standard deviation is thus used as a measure of the risk for the reason that it examines the historical price fluctuations of the underlying assets. Hence, the higher standard deviation,

the higher risk the asset bears. Based on the calculation, Reynolds is riskiest because it has the highest standard deviation.

3 Suppose Sharpes position had been 99% of equity funds invested in the index fund, and 1% in the individual stock. Calculate the return and variability of each portfolio using each stock. How does each stock affect the return and variability of the equity investment? Which portfolio is riskiest? How does this relate to your answer to question 2?

S&P 500

Portfolio #1

S&P500 and Reynolds

Portfolio #2

S&P500 and Hasbro

Mean

0.57%

0.59%

0.58%

Variance

0.13%

0.13%

0.13%

Standard Deviation

3.60%

3.59%

3.62%

Effect on the initial equity investment:

Portfolio #1: Higher expected return, lower variability

Portfolio #2: Higher expected return, higher variability

Conclusion:

Per the answer of question 2, portfolio #2 is the riskiest for the reason that it has the highest standard deviation.

4 Perform a regression of each stocks monthly returns on the Index returns to compute the beta for each stock. How does this relate to the situation described in question 2 above? In what stock(s) (if any) should Sharpe invest? How might the expected return for each stock relate to its riskiness?

5 What would be your (i) goal and (ii) strategy if you are the portfolio manager? Please provide a reasonable analysis to support your goal and strategy.a