1. Estimateandcomparethereturnsandvariability(i.e.annualstandarddeviation)ofReynolds
andHasbrowiththatoftheS&P500IndexoverJan2002throughJun2008? Whichasset
appearstoberiskiestduringeachperiod?
Hint:comparetherewardtoriskratioofthethreeassets.
Note:Theattachedspreadsheetcontainsthemonthlyclosingpricesforthetwostocks.Before
youestimatetheaveragesandthestandarddeviations,youwillhavetoestimatethemonthly
returns.Youcanusecontinuouslycompoundedmonthlyreturn Rt ln Pt ln Pt 1
Anadvantageofcontinuouslycompoundedreturnsisthat,theannualaverage=12*monthly
average;and,annualvariability=square root(12)*(monthlystandarddeviation).
Pt Pt 1
Ifyouusediscretereturns Rt ,thentogettheannualaverage,youwillhaveto
Pt 1
estimatetheEARandthecalculationsforannualvariabilitygetsabitcomplicatedtoo.
2. SupposeSharpespositionhadbeen99percentofequityfundsinvestedintheS&P500and
eitheronepercentinReynoldsoronepercentinHasbro.Estimatetheresultingportfolio
position.Howdoeseachstockaffectthevariabilityoftheequityinvestment?Howdoesthis
relatetoyouranswerinquestion1(a)above?
Hint:estimatethemonthlyreturnsforP1(SP500,HAS),andP2(SP500,REY).Estimatethe
averagereturnandvariabilityofeachportfolio.
3. Performaregressionofeachstocksmonthlyexcessreturnsontheindexexcessreturnsto
computeabetaforeachstock.Howdoesthisrelatetoyouranswerinquestion2above?
Hint:Excessreturnisalsoreferredtoasriskpremium(RiRf)
4. Howmighttheexpectedreturnofeachstockrelatetoitsriskiness(beta)?
5. Inwhatstock(s)(ifany)shouldSharpeinvest?
6. WhatwastheholdingperiodreturnfortheQuestion5chosenportfolioascomparedtothe
rejectedportfolioover:
a. Jul2008 through Dec20010?
b. Jul2008through Oct2014?
Commentontheresults.