Case study Alex Portfolio
Case questions with solutions for ‘Alex Sharpe’s Portfolio’
Abhijit Nandi P301413CMG286
Aniket Saha P301413CMG
AdityaGanti P301413CMG
Devesh Joshi P301413CMG
Mallikarjun Swami P301413CMG324
Management Of Risk ( RSK 611)
Term 5 ( MBA – Finance & Banking ) Batch 6
Case questions with solutions for ‘Alex Sharpe’s Portfolio’
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?
Parameters
S&P 500
Reynolds (RJR)
Hasbro (HAS)
Average returns
0.57%
1.87%
1.18%
Variance
0.001
0.009
0.007
standard deviation(Risk)
0.036
0.094
0.081
From the table we can say that investing in Reynolds stock is risky.
2. Suppose Sharpe’s position had been 99 percent of equity funds invested in the S&P 500 index and either one percent in Reynolds or one Percent 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?
Parameters
99% S&P+1%RJR
99% S&P + 1 % HAS
Average returns
0.569%
0.580%
Variance
0.001
0.001
standard deviation(Risk)
0.0357
0.0362
Portfolio 1 return = (0.99*S&P return)+(.01*RJR return)
Portfolio 2 return = (0.99*S&P return)+(.01*HAS return)
From table we can deduce that portfolio 2 gives slightly higher return with higher risk associated.
By diversifying the portfolio we can reduce the risk and obtain reasonable risk
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?
Parameters
S&P 500
Reynolds (RJR)
Hasbro (HAS)
Co Variance Between S&P & RJR (a) 0.0009
0.0018
Variance of S&P(b) 0.0013
0.0013
Beta= (a)/(b) 0.724
1.396
Beta of Hasbro is higher than 1 which means a positive correlation. If market gives return of 1% then Hasbro
Abhijit Nandi P301413CMG286
Aniket Saha P301413CMG
AdityaGanti P301413CMG
Devesh Joshi P301413CMG
Mallikarjun Swami P301413CMG324
Management Of Risk ( RSK 611)
Term 5 ( MBA – Finance & Banking ) Batch 6
Case questions with solutions for ‘Alex Sharpe’s Portfolio’
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?
Parameters
S&P 500
Reynolds (RJR)
Hasbro (HAS)
Average returns
0.57%
1.87%
1.18%
Variance
0.001
0.009
0.007
standard deviation(Risk)
0.036
0.094
0.081
From the table we can say that investing in Reynolds stock is risky.
2. Suppose Sharpe’s position had been 99 percent of equity funds invested in the S&P 500 index and either one percent in Reynolds or one Percent 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?
Parameters
99% S&P+1%RJR
99% S&P + 1 % HAS
Average returns
0.569%
0.580%
Variance
0.001
0.001
standard deviation(Risk)
0.0357
0.0362
Portfolio 1 return = (0.99*S&P return)+(.01*RJR return)
Portfolio 2 return = (0.99*S&P return)+(.01*HAS return)
From table we can deduce that portfolio 2 gives slightly higher return with higher risk associated.
By diversifying the portfolio we can reduce the risk and obtain reasonable risk
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?
Parameters
S&P 500
Reynolds (RJR)
Hasbro (HAS)
Co Variance Between S&P & RJR (a) 0.0009
0.0018
Variance of S&P(b) 0.0013
0.0013
Beta= (a)/(b) 0.724
1.396
Beta of Hasbro is higher than 1 which means a positive correlation. If market gives return of 1% then Hasbro