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FF Assignment
Alex Sharpes Portfolio
From the above tables, we can see that Reynolds has a higher standard
deviation which means higher variability in the past resulting in higher
returns. Hasbros variability is lesser than that of Reynolds and hence the
average returns are also lower than Reynoldss. Out of the two shortlisted
stocks, Reynolds will be considered riskier because of the higher variability in
returns.
If 99% of the funds are invested in S&P 500 and the remaining 1% is invested
in either of the stocks, the portfolio is going to represent the index since only
1% is contributed by the stocks which will have a minimum effect on the
returns and variability on the investment. However the variability is
decreased by 0.02% by this combination which signifies that divarication in
this case does have a positive impact.
Reynolds However looks like a better option than Hasbro since its returns are
higher and the 1% impact on returns would be greater than the 1% impact of
18010044
FF Assignment
Alex Sharpes Portfolio
The Beta states that Hasbro is a riskier stock since it has a higher coefficient
to market risk. According to the Variability stated in the aforementioned
questions, we said that Reynold is more risky stock however Beta shows
otherwise. The returns on Hasbro are more volatile than the market.
Reynolds however has a volatility less than the market.
4. How might the expected return of each stock relate to its riskiness?
The risk of each stock is compensated by the returns earned by the investor.
Higher risk would generally mean higher returns for a risk averse investor. For
an investor, best way is to keep the stock for a longer period of time or
diversify the portfolio in order to reduce the risk.
18010044
FF Assignment
Alex Sharpes Portfolio
5.
Reynolds has a lower volatility and higher returns, this would be the best
option for Sharpe to diversify the portfolio combining it with S&P 500.
Investing just in the stocks wouldnt be wise as investing in S&P 500 would
give him stability in his portfolio and make it well diversified.