# Investment and Return

**Topics:**Investment, Capital asset pricing model, Modern portfolio theory

**Pages:**3 (575 words)

**Published:**October 31, 2012

Student Assignment

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

Average Returns:

S&P 500 = 0.57%

Reynolds= 1.87%

Hasbro = 1.18 %

Portfolio Return: Weight * Return + Weight2 * Return2

Choosing Reynolds

Portfolio Return = .99(.57)+ .01(1.87) = .583 or 58.3%

Choosing Hasbro

Portfolio Return = .99(.57)+ .01(1.18) = .5761 or 57.61%

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?

Reynolds Beta: 0.75

Hasbro’s Beta: 1.43

This confirms that Hasbro...

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