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? Reynolds appears to be the riskiest stock based on the returns and variability alone currently holding the highest average return out of two at 1.87%. With their higher return rate over the three they also hold the highest standard deviation of 9.1%, which in turn infers that they may hold the highest beta out of the three.

2. Portfolio Risk
Suppose Sharpe’s position had been 99 percent of equity funds invested in the S&P 500 and either one per cent in Reynolds over 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?

Weight: .99 in S&P 500
Alternative: .01 in Reynolds or Hasbro

Reynolds stock fluctuates more than Hasbro’s so the return is higher to accommodate the increased variability that Reynolds offers. On the other hand, Hasbro is less variable than Reynolds therefore the return on the equity investment is lower since the risk is lower. In reviewing this information it confirms the answer I stated in question 1 regarding which stock appears to be the riskiest.

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?

...Solution to Case 02
Risk and Return
Flirting With Risk
Questions:
1. Imagine you are Bill. How would you explain to Mary the relationship between risk and return of individual stocks?
I would explain to Mary that risk and return are positively related, i.e. if one expects to earn higher returns, then one has to be willing to invest in stocks whose price can vary significantly from year to year...

...You are offered a T-note that pays $1,000 in 9 months (or 270 days) for $910. You have $910 in a bank that pays a 5% nominal rate, with 365 daily compounding. You plan to leave the money in the bank if you don’t buy the risk-free T-note.
Which investment should you choose? Use the following all three solution methods to verify your answer.
Greatest future wealth: FV
Figure out FV of $910 left in a bank with 9 months, and then compare with T-note’s FV=$1,000
Inputs: N = 270,...

...Introduction
An investment is an exposure of cash that has the objective of producing cash inflows in the future. The worthiness of an investment is measured by how much cash the investment is expected to generate.
The analysis of Return on Investment (ROI) is a financial forecasting tool that assists the business manager in evaluating whether a proposed investment opportunity is worthwhile within the...

...\
Return on Investment
Name
Institutional Affiliation
QUESTION 1
Experts argue that its essentials to establish ROI parameters before embarking on new public health projects especially those involve acquisition of new information technologies. This means that before embarking on the projects, organizations should calculate the incremental gain from such actions basing their parameters on the long term gain. Before undertaking healthcare...

...
ROI Project: Phase #1
Return on Investment (ROI): An examination of ROI financial analysis and its historical roots with the DuPont Company
Return on Investment (ROI): An examination of ROI financial analysis and its historical roots with the DuPont Company
Like it or not, with the current state of the economy, as well as, enforced implications of the Affordable Care Act, a large number of...

...Assignment #1 – Return on Financial Assets
Money and Banking – Fall 2011
October 30, 2011
Assignment 1: Return on Financial Assets
1. Consider the following four debt securities, which are identical in every characteristic except as noted:
W: A corporate bond rated AAA
X: A corporate bond rate BBB
Y: A corporate bond rated AAA with a shorter time to maturity than bonds W and X
Z: A corporate bond rated AAA with the same time to maturity as bond Y...

...Risk Premium Estimation. Two approaches you could use to estimate the Equity Risk Premium:
* Assume that expected return on the market portfolio is related to a Macroeconomic variable, e.g., GDP. Then use the expected changes in the macroeconomic variable, with appropriate probabilities to estimate expected return on the market portfolio. Subtract the RFR from the expected return estimated and arrive at your equity risk premium. Don’t forget to...

...is that all available information is incorporated into a company’s share price. As such, consensus estimates of earnings growth should be reflected in the company’s price and no excess returns can be made from this information (Zacks (1979)).
In spite of this, growth is an important determinant of security returns as strategies focusing on investing in stocks with the dual characteristics of a low PE ratio and high EPS outperforms stocks with a low PE alone (Bird...

7587 Words |
21 Pages

Share this Document

{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/images-study.netdna-ssl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"US","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":36342664,"categoryName":"Organizations","categoryParentId":"3","currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":3,"pageRange":"1-3","totalPages":3}},"access":"premium","title":"Investment and Return","additionalIds":[17,9,27,7],"additional":["Literature","Entertainment","Sports \u0026 Recreation","Education"],"loadedPages":{"html":[],"text":[1,2,3]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/Investment-And-Return-1189590.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffree-trial\u0026bypassPaymentPage=1","showModal":"get-access","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"},"analytics":{"googleId":"UA-32718321-1"}}