FINA 5210: Investment Analysis (Prof. Abhiroop Mukherjee)
Alex Sharpe’s Portfolio Discussion Guidelines
1. Download the raw data file from the LMES website under folder Cases Alex Sharpe’s Portfolio. Estimate and compare the average returns and variability of Reynolds and Hasbro. Which stock appears to be the riskiest by itself?
Computing the average returns and standard deviations of Reynolds and Hasbro gives us the results shown in the table below. If the stocks are judged just by themselves, Reynolds has a higher standard deviation than Hasbro (9.37>8.12), hence it is more risky.
Question: Can we also consider the sharpe-ratio? This would show some kind of risk ...view middle of the document...
37% | 8.12% | | | |
| | | | | | |
Portfolios | w1 | w2 | w3 | Mean | Stdev | Sharpe |
a | 99.00% | 1.00% | | 0.587% | 3.59% | 11.03% |
b | 99.00% | | 1.00% | 0.580% | 3.62% | 10.76% |
Correlation-Matrix | V500 | REYNOLDS | HASBRO |
| V500 | 100.0% | 28.3% | 63.0% |
| REYNOLDS | 28.3% | 100.0% | 5.8% |
| HASBRO | 63.0% | 5.8% | 100.0% |
3. Perform a regression of each stock’s monthly excess returns on the V500 Index excess returns to find the “beta” for each stock. What is the meaning of the slope estimate, and how does it relate to your answer in question 2?
Question: I ran a regression for both excess returns and normal returns, they are almost the same. I guess, we are supposed to use the excess returns version?
The slope of the estimate, also referred to as β in the CAPM, is the covariance of the individual stock with the market divided by market portfolio variance. It quantifies the risk of the stock compared to that of the overall market. The slope as calculated by the regression shows statistically significant results for both Reynolds and Hasbro on with t-statistics above 2. Reynolds has a lower beta than Hasbro (0.74<1.42) which means it is less risky than the overall market.
This contrasts with the answer given in 1), where Reynolds was judged as riskier all by itself. Compared to the overall market Hasbro is riskier than Reynolds.
Furthermore, these results verify the...