Synopsis: Alex Sharpe ponders an investment strategy for his children's educational savings. This money was currently invested in the Vanguard 500 Index Fund, a no-load mutual fund set up to monitor the performance of the S&P 500. Sharpe was considering changing his passive investment strategy to achieve higher returns. active.

Assignment: Give a quick summary of Alex Sharpe's situation. Discuss Ms. Sharpe's strategies and goals and how she can “add value”. Think about efficiency, risk-return, and how to add value. Add a portfolio makeover suggestion (weights and even suggestions of other stocks).

1. Estimate and compare the returns and volatility of Reynolds and Hasbro with the S&P 500 Index. Which stock looks the riskiest?

2. Assume that 99% of Sharpe's position's equity funds are invested in the S&P 500 and 1% in Reynolds or 1% in Hasbro. Estimate the resulting portfolio position. How does each stock affect the volatility of equity investment? How does this relate to your answer to question 1 above?

3. Calculate the "beta" for each stock. What does beta measure? How does this relate to your previous answers?

4. What is the relationship between the expected return of each stock and its risk?

5. What is the required rate of return (CAPM) for each stock? Explain the number and put it in context?

6. In which stock(s) (if any) should Sharpe invest? Give some advice on what you would do if you were Alex Sharpe. Would you try something different?

History	RF (%)
January-02	1.65
february-02	1.73
Mar-02	1.79
Nis-02	1.72
May-02	1.73
Haz-02	1.70
July-02	1.68
August-02	1.62
September-02	1.63
Oct-02	1.58
November-02	1.23
Dec-02	1.19
January-03	1.17
february-03	1.17
Mar-03	1.13
Nisan-03	1.13
May-03	1.07
Haz-03	0.92
July-03	0.90
August-03	0.95
September-03	0.94
Oct-03	0.92
November-03	0,93
Dec-03	0.90
January-04	0,88
february-04	0,93
Mar-04	0.94
Nisan-04	0.94
May-04	1.02
Haz-04	1.27
July-04	1.33
August-04	1.48
September-04	1.65
Oct-04	1.76
November-04	2.07
December-04	2.19
January-05	2.33
february-05	2.54
Mar-05	2.74
Nis-05	2,78
May-05	2.84
Haz-05	2,97
July-05	3.22
August-05	3.44
September-05	3.42
Oct-05	3.71
November-05	3,88
December-05	3,89
January-06	4.24
Feb-06	4.43
Mar-06	4.51
Nisan-06	4.60
May-06	4.72
Haz-06	4.79
July-06	4.95
August-06	4,96
September-06	4.81
Oct-06	4.92
November-06	4.94
December-06	4.85

History	S&P 500	REYNOLDS	HASBRO
2-January	-1.70%	%6,13	%1,66
2-February	-2.31%	%9,87	-%13,27
2-Mart	%4,37	-%1,37	%10.55
2-Nis	-5.06%	%6,87	%1.01
2-May	-1.19%	%2,17	-4.26%
2-June	-7.15%	-23.97%	-%11,37
2-July	-8.23%	%1,64	-9.66%
2-August	%0,64	%7,71	%7,35
2-September	-10.14%	-%31,48	-15.36%
2-October	%7,35	%0,57	-8.18%
2-November	%5,96	-4.81%	%25.44
2-December	-5.50%	%9.09	-9.91%
3-Oca	-2.46%	%0,59	%3,90
3-February	-%1,72	-%5,78	%0,92
3-Mart	%0,89	-19.17%	%14.70
3-Nis	%8,12	-%12,68	%15.19
3-May	%6,18	%21.02	%0,06
3-June	%1,48	%9.15	%9.24
July 3rd	%2,18	-4.54%	%7,78
3-August	%2,34	-%3,86	-%1,86
3-September	-1.06%	%15,78	%0,97
3-October	%5,89	%21,47	%16.70
3-November	%1,51	%14,93	%1,42
3-December	%4,39	%5,34	-%3,75
January 4	%2.20	%1,56	-7.19%
4-February	%1.40	%4,52	%10.73
4-Mart	-1.20%	-1.99%	-%0,55
4-Nisan	-2.56%	%7.06	-13.15%
4-May	%1,24	-13.23%	%4.08
4-June	%2.00	%20.27	-3.36%
4th of July	-%3,88	%6.45	-4.37%
4-August	%0,11	%4,93	%1,98
4-September	%1,91	-9.88%	%1,46
4-October	%1,66	%1.21	-5.90%
4-November	%4,43	%9,83	%7,57
4-December	%3,34	%3,93	%1,84
January 5th	-2.74%	%2,32	%1,14
5th of February	%2.09	%1.90	%7,76
5 Mart	-%1,86	-%1,66	-3.17%
5-Nis	-2.66%	-%3,25	-7.48%
5th of May	%3,59	%6,34	%6,66
5-June	%0,99	-4.96%	%3,02
July 5th	%4,22	%5,72	%5,53
5-August	-%0,78	%0,76	-5.65%
5-September	%0,93	-1.10%	-5.07%
5-October	-2.19%	%2,38	-4.12%
5-November	%3,82	%4,73	%8,39
5-December	%0,19	%7.09	-1.18%
6-January	%3,90	%6.08	%5.05
6-February	-%0,36	%4,96	-4.29%
6-Mart	%1,76	-%0,61	%3,99
6-Nis	%1,15	%3,93	-6.59%
6-May	-3.30%	%0,26	-%5,94
June 6	-0.19%	%4,88	-2.32%
6 July	-%0,28	%9.96	%3,26
6-August	%2,30	%2,65	%8,56
6-September	%1,81	-4.76%	%12.07
6-October	%3,60	%1,92	%13,93
6-November	%2,13	%1,71	%3,20
6-December	%0.91	%1,91	%1,87

Answer rating: 100% (QA)

ANSWER My analysis of Alex Sharpes situation 1 The SP 500 has average returns of about 10 annually o... View the full answer