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Sharpe's Investment Strategy Analysis

Alex Sharpe had invested her children's educational savings in a Vanguard 500 index fund. She was considering a more active investment strategy by adding individual stocks. She was choosing between Hasbro and R.J. Reynolds Tobacco. The analysis showed Reynolds had a higher average return and lower risk profile than Hasbro based on its beta being under 1. The conclusion was to recommend a portfolio of 78% in the S&P 500 and 22% in R.J. Reynolds as it would generate the highest return and lowest risk variance of the options considered.

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14 views2 pages

Sharpe's Investment Strategy Analysis

Alex Sharpe had invested her children's educational savings in a Vanguard 500 index fund. She was considering a more active investment strategy by adding individual stocks. She was choosing between Hasbro and R.J. Reynolds Tobacco. The analysis showed Reynolds had a higher average return and lower risk profile than Hasbro based on its beta being under 1. The conclusion was to recommend a portfolio of 78% in the S&P 500 and 22% in R.J. Reynolds as it would generate the highest return and lowest risk variance of the options considered.

Uploaded by

Shweta R
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ASSIGNMENT 1

ALEX SHARPES
PORTFOLIO

SHWETA RAMTEKE
P37077
INTRODUCTION
Alex Sharpe had invested her childrens educational savings in the Vanguard 500 index, a no-
load mutual fund constructed to track the performance of the S & P 500. Indexing represents
a form of passive fund management that offers a low management expense ratio and has
historically outperformed most actively managed mutual funds. In order to achieve higher
returns, Sharpe had been considering changing her passive investment strategy to one that
was more active. She wanted to begin conservatively by adding carefully chosen stocks to her
current equity portfolio. Based on recent analyst forecasts, MS. Sharpe had narrowed her
search to the following two companies:
1) HASBRO
2) R.J. REYNOLDS TOBACCO COMPANY

SOLUTION:

AVERAGE RATE BETA STANDARD


DEVIATION
REYNOLDS 22.498% 0.72 32.446%
HASBRO 14.206% 1.40 28.114%

Reynolds has an average return of 58.4% higher with a beta that is approximately half
of the Hasbro.
The standard deviation of Reynolds is 15.4% higher than Hasbro.
BETA of Reynolds is less than 1 that means it is less risky than the market.
BETA of Hasbro is greater than 1 that means it is much risky than the market.

CONCLUSION: As Alex Sharpes consultant, we recommend a portfolio of 78% S&P 500


and 22% of R.J Reynolds. This portfolio will generate an annual expected return of 10.33%
whereas the portfolio risk variance is 1.46%.The coefficient of variation is lowest in the
combination of 78% S & P and 22% R.J. REYNOLDS. Tobacco industry tends to move with
the market less than the toy industry, which indicates that R.J Reynolds can diversify the risk
of the original portfolio better.

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