Monthly standard deviation of s&p 500

ALEX SHARPE CASE STUDY 1

ALEX SHARPE CASE STUDY 2

Estimate the returns viability

The data provided shows that the riskiest stock is that of Reynold. The riskiest nature of Reynold is obtained from the fact that it has a monthly standard deviation of 9.17 and an annual standard deviation of 32.45.

Reynold is then followed by Hasbro’s regarding the extent of risk possibility. Hasbro’s has a monthly standard deviation of 8.12% and an annual standard deviation of 28.11%. The standard deviation of Reynold is almost twice of that of Hasbro’s.

The least risky stock is that of S&P 500 which has a monthly standard deviation of 3.6% and an annual standard deviation of 12.48%. The data shows that for the last five years 68% of the data points have drastically declined.

2. Suppose Sharpe’s position had been 99% of equity funds invested in S&P 500 and either one 1% in Reynolds or 1% 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 to Question 1 above?

Reynold serves a better place than S&P 500 based on the calculations done. The results of calculation show that Reynold has a standard deviation of 3.46%, which is smaller when compared to S&P 500. Also, the expected return of 59% is much higher than that of S&P 500. When Reynold and S&P 500 are combined, the variability of equity is lower than both are taken separately. This answer in question 2 relates to the answer given in problem 1 in that, S&P 500 seems to be much riskier than Reynolds when both taken individually.

3. Perform a regression of each stock's monthly returns (y-value) on the Index returns (x-value) to compute a ‘beta' (slope on x variable) for each stock. How does this relate to your answer to question 2 above? Use Excel to perform the regression.

The calculation of regressing analysis shows that Hasbro’s has beta coefficient more negative than Reynold, which has a beta factor of 1.42 while Hasbro’s has 1.42. Also, Hasbro’s is more negative than Reynold in general market aspect. The Reynold’s lower beta coefficient makes it have a relatively insignificant impact on portfolio impact. There is a close relationship between this answer and the one given in question 2. That is, at the weight of 1%, both Reynold and Hasbro have a standard deviation that is equal to each other. That is, even though Reynold has a high standard deviation. The situation is a result of Reynold having a lower beta that lowers its effect on the variance of the combined portfolio.

4. How might the expected return of each stock relate to its riskiness?

Generally, riskiness is directly related to stocks expected return. Bearing in mind that, the primary factor that is considered to determine the possible return of best fit is merely the expected return. Also, the risks that are directly related to expected return should be minimal as much as possible. This statement means that those individuals who are involved in investing in portfolios of more significant risks are compensated to the same degree as those individuals investing in overtime investments. One approach that can be used to minimize risks is to hold the stock. The alternative method that would serve the same purpose is to diversify the portfolio through the combination of two or more stocks. Portfolio diversification is one of the most appropriate ways since the funds are not place in one basket.

5. In what stock(s) if any should Sharpe invest?

The best stock that Sharpe should invest in is Reynolds. On the other hand, it would recommend the Sharpe to diversify the portfolio by combining both S&P 500 and Reynold. The main reason that is behind my suggestion of the combination of both companies is just that it will minimize or in some cases wholly evade the risks. Generally, there are many risks associated with basing the portfolio on one stock.

References

Southam, c. (n.d). Sharpe’s case study