Alex Sharpe's Portfolio

634 Words Sep 8th, 2014 3 Pages
Executive Summary

Our team concludes that risk and return are strongly correlated. A higher risk usually yields a higher return. Our team observed that within Alex Sharpe’s portfolio, the Reynolds’ fund holds the highest risk (highest standard deviation of 32.45%), as well as the highest return (16.27% in comparison to Hasbro’s return of 11.31%). Although a lower standard deviation (lower risk) is ideal for an investment portfolio, the Reynolds’ fund yields a higher return for the higher associated risk. Furthermore, our team’s data illustrated that the mix of S&P with Reynolds has a higher return and lower standard deviation than the S&P alone. In addition, if Sharpe invests in Reynolds and Hasbro equally, at for instance, one
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While Reynolds has the higher std dev, the mix of S&P with Reynolds has a higher return and lower std dev than the S&P alone. Adding Hasbro to the S&P however increases risk and return. | S&P500 | Reynolds | Hasbro | Arithmetic | 6.89% | 7.05% | 6.97% | Std Dev | 12.48% | 12.45% | 12.53% |

3. Regression Analysis to Calculate Beta

Perform a regression of each stocks’ monthly returns on the Index returns to compute a “beta” for each stock. How does this relate to your answer in question 2 above? That is, run a regression of excess returns on a stock as the dependent variable and the excess return of the market as the independent variable. Include a constant. The beta is also Covariance[r_i, R_m]/Var[R_m], where R_m is the return of the market.

Risk free rate from regression =AVERAGE(0.0145226009606485,0.00368395181284158) = 0.009103276

Reynolds
Constant (estimated risk free return): 0.014522601
Slope (beta from regression): 0.735763036
Beta calculated using covariance: 0.723500319

Hasbro
Constant (estimated risk free return): 0.003683952
Slope (beta from regression): 1.419799452
Beta calculated using covariance: 1.396136128

4. Capital Asset Pricing Model (CAPM)

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

The return of each stock influences the stock’s riskiness. The higher the risk, the higher the stock’s return.
Calculating the Sharpe

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