ALEX SHARPES PORTFOLIO
On Friday, January 26, 2007, Alex Sharpe at in her home office and pondered her investment strategy. During her MBA program, Sharpe had learned that in an efficient market, investors should buy and hold the Standard & Poor (S&P) 500 was the most commonly used benchmark for the overall U.S. stock market, Sharpe had invested her children's educational savings in the Vanguard 500 Index Fund, a no-load mutual fund constructed to track the performance of the S&P 500.
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity and industry grouping, among other factor. This index is meant to reflect the risk and return characteristics of large-cap stocks. The S&P 500 is a market value weighted index. There were a number of financial products available to investors that are based on the S&P 500, including Vanguard's Investors chose these index funds to provide themselves with a broad market exposure without buying 500 different stocks. Vanguard is unique in that it is owned by the fund themselves, which better aligns management's interests with those of their shareholders. In contrast other mutual funds have to balance the goals of providing a profit for their outside owners with that of providing the most cost effective funds for their shareholders.
In order to achieve higher returns, Sharpe had been considering to change 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 forecast, Ms. Sharpe had narrowed her search to the following two companies:
Hasbro (NYSE: HAS) was an American toy and game company that was the second largest toy maker in the world, next to Mattel (see Exhibit 1).
The original cases (Ivey 908N20) were prepared by Richard Ivey School of Business Professor Colette Southam and revised by Dr. Song-Kyoo (Amang) Kim, Faculty of Business, Al Hosn University. All case materials are prepared solely for the purpose of class discussion. They are neither designed nor intended to illustrate the correct or incorrect management of problems or issues contained in the case.
Copyright 2016, Dr. Amang (Song-Kyoo) Kim, Al Hosn University, Abu Dhabi, United Arab Emirates (https://www.alhosnu.ae). No part of this publication may be reproduced, stored in a retrieval system, used in a report or spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the consent of Dr. Kim. To order copies, interested parties must contact Dr. Kim ([email protected]), Al Hosn University, PO Box 38772, Abu Dhabi, UAE.
Industry sources expected Hasbro to introduce several innovative toys linked to summer 2007 lock busters such as Spider Man 3 and The Fantastic Four: Rise of the Silver Surfer. Additionally, Hasbro's full length, live action movie based on the company's enormously popular Transformers which produced by Tom DeSanto (X-Men, X-Men 2 and X-Men United) were scheduled to open in summer 2007.
R.J. Reynolds Tobacco Company (RJR) was the second largest tobacco firm in the world (see Exhibit 2), with a share of approximately 30% of U.S. cigarette market. R.J. Reynolds was a wholly owned subsidiary of Reynolds American Inc. (NYSE: RAI). The company faced some unique challengers: most consumer product companies did not have to spend millions of dollars annually on advertising aimed at discouraging use of their product for consumes under the age of 18. R.J. Reynolds had been subject to huge litigation for many decades; the company had a strong track record in defending tobacco related cases in court and assured its shareholders that it would continue to take appropriate steps to maintain a successful litigation record.
Risk and Return
The last five years' worth for monthly returns for the Vanguard 500 Index Fund, Hasbro and R.J. Reynolds are provided (see Exhibit 3) In addition to compare the returns on the individual components of her portfolio, Sharpe also wanted to fully compare the risk profiles of the two companies to that of the Vanguard Fund. She wanted to ensure that the expected return f her new portfolio would provide adequate compensation for talking on any new risky assets. To find the investments of her portfolio, Alex has faced the following issues:
- Which stock appears to be riskiest based on the annual standard deviation over the past five years?
- The investment return rate of each stock is correlated with S&P 500 Index?
- How might the expected return of each stock related to its riskiness?
- In what stock(s) (if any) should Alex invest?
This case study needs to be done.
Exhibit 3: Investment Return Data
|
Date
|
S&P 500
|
Reynolds
|
Hasbro
|
|
Jan./2002
|
-1.7 %
|
6.13%
|
1.66%
|
|
Feb.
|
-2.31%
|
9.87%
|
-13.27%
|
|
Mar.
|
4.37%
|
-1.37%
|
10.55%
|
|
Apr
|
-5.06%
|
6.87%
|
1.01%
|
|
May
|
-1.19%
|
2.17%
|
-4.26%
|
|
Jun.
|
-7.15%
|
-23.97%
|
-11.37%
|
|
Jul.
|
-8.23%
|
1.64%
|
-9.66%
|
|
Aug.
|
0.64%
|
7.71%
|
7.35%
|
|
Sep.
|
-10.14%
|
-31.48%
|
-15.36%
|
|
Oct.
|
7.35%
|
0.57%
|
-8.18%
|
|
Nov.
|
5.96%
|
-4.81%
|
25.44%
|
|
Dec.
|
-5.50%
|
9.09%
|
-9.91%
|
|
Jan./2003
|
-2.46%
|
0.59%
|
3.90%
|
|
Feb.
|
-1.72%
|
-5.78%
|
0.92%
|
|
Mar.
|
0.89%
|
-19.17%
|
14.70%
|
|
Apr.
|
8.12%
|
-12.68%
|
15.19%
|
|
May
|
6.18%
|
21.02%
|
0.06%
|
|
Jun.
|
1.48%
|
9.15%
|
9.24%
|
|
Jul.
|
2.18%
|
-4.54%
|
7.78%
|
|
Aug.
|
2.34%
|
-3.86%
|
-1.86%
|
|
Sep.
|
-1.06%
|
15.78%
|
0.97%
|
|
Oct.
|
5.89%
|
21.47%
|
16.70%
|
|
Nov.
|
1.51%
|
14.93%
|
1.42%
|
|
Dec.
|
4.39%
|
5.34%
|
-3.75%
|
|
Jan./2004
|
2.20%
|
1.56%
|
-7.19%
|
|
Feb.
|
1.40%
|
4.52%
|
10.73%
|
|
Mar.
|
-1.20%
|
-1.99%
|
-0.55%
|
|
Apr.
|
-2.56%
|
7.06%
|
-13.15%
|
|
May
|
1.24%
|
-13.23%
|
4.08%
|
|
Jun.
|
2.00%
|
20.27%
|
-3.36%
|
|
Jul.
|
-3.88%
|
6.45%
|
-4.37%
|
|
Aug.
|
0.11%
|
4.93%
|
1.98%
|
|
Sep.
|
1.91%
|
-9.88%
|
1.46%
|
|
Oct.
|
1.66%
|
1.21%
|
-5.90%
|
|
Nov.
|
4.43%
|
9.83%
|
7.57%
|
|
Dec.
|
3.34%
|
3.93%
|
1.84%
|
|
Jan./2005
|
-2.74%
|
2.32%
|
1.14%
|
|
Feb.
|
2.09%
|
1.90%
|
7.76%
|
|
Mar.
|
-1.86%
|
-1.66%
|
-3.17%
|
|
Apr.
|
-2.66%
|
-3.25%
|
-7.48%
|
|
May
|
3.59%
|
6.34%
|
6.66%
|
|
Jun.
|
0.99%
|
-4.96%
|
3.02%
|
|
Jul.
|
4.22%
|
5.72%
|
5.53%
|
|
Aug.
|
-0.78%
|
0.76%
|
-5.65%
|
|
Sep.
|
0.93%
|
-1.10%
|
-5.07%
|
|
Oct.
|
-2.19%
|
2.38%
|
-4.12%
|
|
Nov.
|
3.82%
|
4.73%
|
8.39%
|
|
Dec.
|
0.19%
|
7.09%
|
-1.18%
|
|
Jan./2006
|
3.90%
|
6.08%
|
5.05%
|
|
Feb.
|
-0.36%
|
4.96%
|
-4.29%
|
|
Mar.
|
1.76%
|
-0.61%
|
3.99%
|
|
Apr.
|
1.15%
|
3.93%
|
-6.59%
|
|
May
|
-3.30%
|
0.26%
|
-5.94%
|
|
Jun.
|
-0.19%
|
4.88%
|
-2.32%
|
|
Jul.
|
-0.28%
|
9.96%
|
3.26%
|
|
Aug.
|
2.30%
|
2.65%
|
8.56%
|
|
Sep.
|
1.81%
|
-4.76%
|
12.07%
|
|
Oct.
|
3.60%
|
1.92%
|
13.93%
|
|
Nov.
|
2.13%
|
1.71%
|
3.20%
|
|
Dec.
|
0.91%
|
1.91%
|
1.87%
|
I need one more in the same case study but different style that the instructor will not notes.