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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:

Monthly average return=0.57%

Annual return= 6.89%

Annual SD= 12.477% (monthly SD 3.60* 3.46 (square of 12))

Reynolds:

Monthly average return= 1.87%

Annual return= 1.87% * 12= 22.50%

Annual SD: 32.446% (monthly SD 9.37* 3.46 (square of 12))

Hasbro:

Monthly average return= 1.18%

Annual return= 1.18% * 14.21%

Annual SD= 28.114% (monthly SD 8.12* 3.46 (square of 12))

Conclusion: Correlation between high risk and high return. Reynolds is the riskier stock with an annual SD of 32.41% over 5 years, compared to Hasbro’s 28.08%. Reynolds annual return over the 5 year period of 22.50% is also higher than Hasbro’s return of 14.21%.

2. Portfolio Risk

Suppose Sharpe’s position had been 99 percent of equity funds invested in the

S&P 500 and either one percent 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?

ER of .99 S&P + .01 Reynolds

Annual: 7.0481%

SD of Reynolds in Portfolio

Monthly: 3.5933%

Annual: 12.4476%

ER of .99 S&P + .01 Hasbro

Annual: 6.9651%

SD Hasbro in Portfolio

Monthly: 3.6174%

Annual: 12.5310%

Results: Although Reynolds was shown to be an overall riskier stock in question 1, its lower standard deviation illustrates that it is less correlated than Hasbro to the S&P 500, thereby decreasing the variability of the portfolio, which makes it less risky in comparison to Hasbro.

3. Regression Analysis to Calculate Beta

Perform a regression of each stocks’ monthly returns on the Index returns to compute a “beta”...

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