E Summit Street
Kent, Ohio 44240
February 1, 2007
Ms. Alex Sharpe
Columbus, Ohio 43201
Dear Ms. Shape:
I’m writing to give you some recommendations on your investment strategy on behalf of the College of Business Administration of Kent State University.
From the information that you provided to us, I found that you want to pursue a more active investment strategy by adding stocks to your current equity portfolio in the Vanguard 500 Index Fund. And you are interested in the Hasbro and Reynolds. So I have done some analysis on the possible combination of these stocks.
First, I did a summary statistics of the three assets base on the latest five years’ worth of ...view middle of the document...
In the opposite situation, it works in the same way. This means that combining Vanguard and Hasbro would either gain more or lose more, while combining Vanguard and Reynolds could either lose less or gain less.
There are several ways that you can form your portfolio, combine Vanguard and Hasbro; combine Vanguard and Reynolds; combine Vanguard, Hasbro and Reynolds. If you chose to combine Vanguard and Hasbro together, and you are going to keep the standard deviation as 6 (the average standard deviation of these three asset), you can invest 47% in Vanguard and 53% in Hasbro with an expected return of 0.89. If you chose to combine Vanguard and Reynolds and keep the standard deviation as 6, you can invest 58% in Vanguard and 42% in Reynolds with an expected return of 1.11. And if you chose to invest certain amount in Vanguard, Hasbro and Reynolds, again try to keep the standard deviation as 6, you can invest 30% in Vanguard, 62% in Reynolds and 0.08% in Hasbro.
For standard deviation, we use it to measure the stand-alone risk of certain asset, which include both the systematic risk and unsystematic risk. However, when combining the assets into the portfolio, due to the correlation among the assets, certain amount of unsystematic risk could be diversified. Suppose all of the unsystematic risks could be diversified after the combination of the assets, we could use ß to measure each variable’s risk. So we have the ß of Vanguard for 0.98, the ß for Reynolds for 0.71 and the ß for Hasbro for 1.38. As if we follow the same investment strategy of the three hypothesis situations in the previous paragraph, we could have a ß in...