Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 36 views

    Drew

    Uploaded by

    musunna galib
    The document analyzes stock performance data for Reynolds, Hasbro, and the S&P 500 over 60 months. It finds that the S&P 500 had the lowest risk but also the lowest returns, while Reynolds had the highest returns but also the highest risk. Adding Reynolds to a portfolio consisting of 99% S&P 500 and 1% of the other stock slightly decreases risk, while adding Hasbro increases risk due to its higher correlation with the S&P 500. Regression analysis finds Hasbro has a higher beta of 1.42 compared to Reynolds' 0.736, indicating it contributes more unsystematic risk. The findings make economic sense given the inherent litigation and advertising risks of Reynolds in tobacco versus the sales volatility risks

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Drew

    Uploaded by

    musunna galib
    36 views2 pages
    The document analyzes stock performance data for Reynolds, Hasbro, and the S&P 500 over 60 months. It finds that the S&P 500 had the lowest risk but also the lowest returns, while Reynolds had the highest returns but also the highest risk. Adding Reynolds to a portfolio consisting of 99% S&P 500 and 1% of the other stock slightly decreases risk, while adding Hasbro increases risk due to its higher correlation with the S&P 500. Regression analysis finds Hasbro has a higher beta of 1.42 compared to Reynolds' 0.736, indicating it contributes more unsystematic risk. The findings make economic sense given the inherent litigation and advertising risks of Reynolds in tobacco versus the sales volatility risks

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document analyzes stock performance data for Reynolds, Hasbro, and the S&P 500 over 60 months. It finds that the S&P 500 had the lowest risk but also the lowest returns, while Reynolds had the highest returns but also the highest risk. Adding Reynolds to a portfolio consisting of 99% S&P 500 and 1% of the other stock slightly decreases risk, while adding Hasbro increases risk due to its higher correlation with the S&P 500. Regression analysis finds Hasbro has a higher beta of 1.42 compared to Reynolds' 0.736, indicating it contributes more unsystematic risk. The findings make economic sense given the inherent litigation and advertising risks of Reynolds in tobacco versus the sales volatility risks

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    36 views2 pages

    Drew

    Uploaded by

    musunna galib
    The document analyzes stock performance data for Reynolds, Hasbro, and the S&P 500 over 60 months. It finds that the S&P 500 had the lowest risk but also the lowest returns, while Reynolds had the highest returns but also the highest risk. Adding Reynolds to a portfolio consisting of 99% S&P 500 and 1% of the other stock slightly decreases risk, while adding Hasbro increases risk due to its higher correlation with the S&P 500. Regression analysis finds Hasbro has a higher beta of 1.42 compared to Reynolds' 0.736, indicating it contributes more unsystematic risk. The findings make economic sense given the inherent litigation and advertising risks of Reynolds in tobacco versus the sales volatility risks

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 2

    1. Calculate the return and st.

    deviation over the 60 months for Reynolds, Hasbro, and the


    S&P index, based on the data in the case. Discuss the amount of total risk in each of the 3
    assets (i.e., which asset had the highest/lowest risk).

    The average return and standard deviation of each stock for monthly periods is as
    follows: S&P 500: 0.51% and 3.60%, Reynolds: 1.42% and 9.37%, Hasbro: 0.87% and
    8.12%.
    The S&P 500 had the lowest returns yet also the lowest risk associated with the stock.
    This makes sense as it is composed of 500 companies and therefore has increased
    diversity. Reynolds turns out to have the highest average returns, but also the highest
    risk. This doesn’t come as a surprise.

    2. Suppose Sharpe had formed portfolios invested 99% in the S&P 500 and 1% in either
    Reynolds or Hasbro over the previous 60 months.
    What would the returns and st. deviation of her portfolios have been?
    For the S&P 500 and Reynolds portfolio the returns and standard deviation would be
    0.52% and 3.59%, respectively. For the S&P 500 and Hasbro portfolio it would have
    returns of 0.514% and a standard deviation of 3.62%.
    How does adding Reynolds to her existing portfolio affect her portfolio risk (st. deviation)?
    By adding Reynolds to the portfolio, the portfolio’s risk is decreased by a small
    amount from 3.60% to 3.59%. This is in part due to the weak correlation the two assets
    have.
    How does adding Hasbro to her existing portfolio affect her portfolio risk (st. deviation)?
    However, when adding Hasbro the portfolios risk increases from 3.60% to 3.62%.
    Even though Hasbro has a smaller risk than Reynolds, the portfolio has its risk
    increase due to the correlation between Hasbro and the S&P 500 is fairly large at 0.68.
    Which stock, Reynolds or Hasbro, is more risky based on its effect on her overall portfolio?
    Hasbro is riskier due to it increasing the overall risk of the portfolio with its addition.
    This is because of the larger correlation compared to Reynolds.

    3 Calculate the beta coefficient for each stock by regressing the returns of the stock against
    the returns of the S&P index over the 60 month period using linear regression is Excel.
    Discuss the amount of beta risk in each stock. How is that related to question 2 above?
    The beta of Reynolds is 0.736 while Hasbro is 1.42. Once again, we see how Hasbro is
    relatively much riskier than Reynolds when viewed relative to the portfolio. A larger
    beta means just this and is part of the reason Hasbro adds risk to the portfolio as
    opposed to Reynolds.

    4. Overall, do your findings make sense from an economic standpoint? For example, what
    products do these two companies make? What are the risks associated with these companies;
    which of those are more likely to be systematic and which idiosyncratic? 
    Yes, I think they do make sense. Obviously, with Reynolds in the tobacco field they
    will have inherent risks dealing with the dangers of smoking and who can and cannot
    smoke. These potential advertising costs and lawsuits are idiosyncratic risks unique to
    Reynolds. As for Hasbro, they produce children toys and are subject to their own risks
    such as movie flops resulting in decreased sales. Overall, with a lower correlation
    factor the portfolio is better able to handle the risk of Reynolds and use the
    diversification to quell the idiosyncratic risks associated with the stock.

    You might also like