By comparing both the stocks. the riskiest stock in this instance is Reynolds. It has the highest return every bit good as higher criterion divergence and the higher discrepancy. If we compare both stocks. Reynolds is riskier than Hasbro in this instance. The higher discrepancy indicates higher opportunity that the existent return on Reynolds will divert from the expected return.
S & A ; P 500
At single stock degree. Reynolds fluctuates more than Hasboro as it has higher Standard Deviation and higher discrepancy. After ciphering the portfolio of both the stocks. it gives us a different image. Looking at the Numberss at portfolio degree. Portfolio A which constitutes Reynolds still has a higher return ( . 587 ) but at a lower standard divergence ( 3. 59 ) and discrepancy ( 12. 9 ) . compared to Hasbro. This means that Reynolds when combined with S & A ; P 500 is giving a higher return at the portfolio degree but with a lower standard divergence and a lower discrepancy when compared with the portfolio of S & A ; P & A ; Hasbro. It besides means Reynolds is less hazardous than Hasbro when combined in a portfolio. Portfolio B ( S & A ; P+Hasboro ) in this instance seems more volatile than Portfolio A ( S & A ; P + Reynolds ) . We can besides state that the discrepancy which is mensurating the hazard involved was reduced by uniting the stock in a portfolio.
Portfolio A ( . 99 S & A ; P + . 01 Reynolds )
Portfolio B ( . 99 S & A ; P + . 01 HASBRO )
Reynolds Beta = . 7358 Hasbro Beta 1. 4198
Calculating the Beta. Hasbro’s beta is more than 1. which means it’s more volatile than the market. We can besides state its 42 % more volatile than the market. Higher beta besides offers a possibility of a higher rate of return but besides with higher hazard. Reynolds has a beta of. 74. which means is less volatile than the market.
Portfolio A ( S & A ; P + Reynolds ) Beta = . 9974 Portfolio B ( S & A ; P + Hasbro ) Beta = 1. 0042 When we add the stocks of Reynolds and Hasbro to the portfolio. the Beta alterations to about similar or close to market. Basically. we can see that holding a stock in a portfolio is better here as stock like Reynolds. which was traveling less than the market is now really near to the market motion at. 9974. Furthermore. Hasbro which was traveling above the market degree is now traveling about with the market at 1. 0042. *Please see the affiliated excel file for computations.
We can’t figure out the peril of the stock by merely looking at the expected return. In the instance of single stock. Reynolds at 1. 87 is giving a higher return compared to Hasbro at 1. 18. We wouldn’t cognize the peril unless we look at the standard divergence or the discrepancy of the stock. By comparing the two. Reynolds has a higher discrepancy and standard divergence and will be more hazardous. When combined with portfolio. we see the discrepancy has changed. Reynolds. which was more hazardous with higher discrepancy separately. when combined with portfolio. has a lower discrepancy than Hasbro. On the other manus. Hasbro. which had well less return and discrepancy separately. when combined in a portfolio. has more volatility. hence going more hazardous.
Alex Sharpe should put in Portfolio A. dwelling of Reynolds and S & A ; P500. Portfolio A gives higher return with lower hazard. The standard divergence and the discrepancy are both lower for portfolio A which means Alex Sharpe will acquire better returns at a much lower hazard as compared to Portfolio B.