Alex Sharpe's Portfolio Solution Essay
1. Returns and Risk
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?
S&P 500 Annualized Expected Return: 6.8920% S&P 500 SD (Annualized): 12.477%
Reynolds Annualized Expected Return: 22.4980% Reynolds SD (Annualized): 32.446%
Hasbro Annualized Expected Return: 14.2060% Hasbro SD (Annualized): 28.114%
Reynolds appears to be the riskiest stock since it has the highest standard deviation. The fact that Reynolds also has the highest annualized expected return supports this calculation since risk and return should be directly correlated.
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4. Capital Asset Pricing Model (CAPM)
How might the expected return of each stock relate to its riskiness?
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