Alex Sharpe Case

Haley Geng, Jack Lee, Dexter Nguyen, Hugh Nguyen, Kaitlin Sanders, and Alejandro Velasquez
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).

S&P 500 REYNOLDS HASBRO

Avg Return 0.57% 1.88% 1.18%
SD (Risk) 3.60% 9.37% 8.12%

Reynolds has the highest risk at 9.37%, which is probably attributed to its legal risk. S&P500 has
the lowest risk at 3.60% due to the diversification.
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? How does adding Reynolds to her existing portfolio affect her portfolio
risk (st. deviation)? How does adding Hasbro to her existing portfolio affect her portfolio risk (st.
deviation)? Which stock, Reynolds or Hasbro, is more risky based on its effect on her overall
portfolio?
S&P 500 REYNOLDS HASBRO
Weight 99% 1% 1%
Portfolio E-Return 0.59% 0.58%
Correlation 0.28 0.63
Portfolio Variance 0.1291% 0.1309%
Portfolio SD (Risk) 3.59% 3.62%

Adding Reynolds reduces the portfolio risk (3.60% to 3.59%) while adding Hasbro increases risk
(3.60% to 3.63%). However, due to the low weight, the impact is not considerable
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?

S&P 500 REYNOLDS HASBRO

Beta 0.74 1.42

With 1% change in S&P 500, Reynolds changes by 0.74% while Hasbro changes by 1.42%. So
Reynolds has lower correlation with S&P 500, thus diversify the portfolio when added to the
portfolio
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?
Reynolds' risks are more of firm-specific risks due to its characteristics of a tobacco company.
As a cigarette company, Reynolds is associated with a lot of legal and regulation risks. Hasbro's
risks are, meanwhile, market risk. It depends on the situation of the economy. For example,
fewer people buy toys if the economy goes down in general.