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Alex Sharpe's Portfolio

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Executive Summary

Our team concludes that risk and return are strongly correlated. A higher risk usually yields a higher return. Our team observed that within Alex Sharpe’s portfolio, the Reynolds’ fund holds the highest risk (highest standard deviation of 32.45%), as well as the highest return (16.27% in comparison to Hasbro’s return of 11.31%). Although a lower standard deviation (lower risk) is ideal for an investment portfolio, the Reynolds’ fund yields a higher return for the higher associated risk. Furthermore, our team’s data illustrated that the mix of S&P with Reynolds has a higher return and lower standard deviation than the S&P alone. In addition, if Sharpe invests in Reynolds and Hasbro equally, at for instance, one percent, the average return for Reynolds is significantly higher (at 7.08%) than the average return for Hasbro (at 6.97%). Computing the Sharpe ratio for each of the portfolios, the one with 1% Reynolds is the highest at. Given this analysis, our team feels that Alex Sharpe should consider investing more in the Reynolds fund than in Hasbro fund.

Stock Analysis

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&P500 | Reynolds | Hasbro | Arithmetic Return | 6.89% | 22.50% | 14.21% | Std Dev | 12.48% | 32.45% | 28.11% |

Reynolds has the highest risk (measured by Std Dev) and highest return. The standard deviation for Reynolds is 32.45% over 5 years. The arithmetic return is 22.5% over the same period.

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…...

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