Case Study

Alex Sharpe’s Portfolio

Problem Set:
1. Estimate and compare the (annualized) returns and risks of Reynolds and Hasbro
with that of the S&P 500 Index. Which stock appears to be riskier?
2. Suppose Sharpe’s position had been 99% of equity funds invested in the S&P 500
and either 1% in Reynolds or 1% in Hasbro. Estimate the resulting portfolio
position. How does each stock affect the risk of the equity investment? How does
this relate to your answer in question 1 above?
3. Perform a regression of each stock’s monthly returns on the Index returns to
compute a “beta” for each stock. How does this relate to your answer in question 2
above?
4. How might the expected return of each stock relate to its riskiness?
5. In what stock(s) (if any) should Sharpe invest?