Case Study.

Agnalygsivs and Report for Alex Sharpefsg.

For this case, you are to analyze the invi_-sinium u«1urrHl:11:1 prm/Id‘-”1, and make recommendations for

Ms. Sharpe regarding the addition of inilivirlual ‘.h.m”. to hot r)of!lollo. YOU Should also consider

whether she would benefit from the inclusion of r.;l’,h holding’, to the portfolio.

In performing the analysis, you are to obtain the data on the risl’.-free rate, the market risk premium,

and the momentum factor as calculated by Kennrcih French for the corresponding time periods of the

case data. Once you have obtained all of the data and entered it into your preferred software package,

provide the following analysis output (at a minimurn.)

1. The summary statistics of each variable.

2. The correlations of the variables.

3. A univariate regression analysis of Hasbro and Vanguard, and RJR and Vanguard. (Vanguard should be

the independent variable in both regressions.)

4. Beta calculations for Vanguard, Hasbro and RJR.

a.) Calculate beta using the formula, [3 = Cov(r,, rm)/omz;
b.) Calculate beta using the CAPM;
c.) Calculate the market beta using the Carhart Four-Factor Model (aka Fama-French 3 Factor «I-

Momentum)

5. Use the calculated betas to calculate the required (anticipated) returns for Vanguard, Hasbro and RJR.

6. Calculate the difference between the actual returns and the required (anticipated) returns, and

statistically analyze the differences.

Feel free to use any additional method(s) for your analysis.

Using the information obtained from the above analytical procedures, form portfolios of any
combination of Vanguard, Hasbro, RJR and cash. (Cash return = 0, but its standard deviation will also
equal 0.)
In forming the portfolios, test possible combinations of the assets to demonstrate the different returns
and different levels of risk. Remember that the goal is to provide the highest return for a given level of
risk, and that a higher level of risk is only acceptable if it provides a sufficiently higher rate of return.
You should also analyze portfolios of shorter time periods, (e.g. 3 years, 1 year, 6 months.) This will help
you in determining your final recommendations since it may give you an indication of the trends of the
various assets. (Using only the entire 5 year period may hide the fact that the majority of an asset’s
returns were years ago and are now moving much lower.) 4

write a report letter to Ms. Sharpe with your recommendations. Use the analysis you have performed
as support for your recommendations. Provide copies of your final outputs as appendices.
CASES View Educator Copy

Alex Sharpe’s Portfolio provides an introduction to the Capital Asset Pricing lvlodel (CAPM), portfolio Di9°iD””°= Finance

diversification and risk management. Sharpe currently holds the Vanguard 500 index Fund; but is considering a soiiiicei ivey pubiishing

more active management strategy. Students must assess the risk ofthe two stocks she is considering adding

to her portfolio. Students are provided with monthly stock returns and must calculate the standard deviations of P’°d’-‘Ct #1 9°3N2°’PDF’EN‘-3

the individual stocks and ofthe portfolios when one ofthe stocks is added to it. Students must calculate the 4pl Eiigiisii pm:

stocks beta using regression and will learn that beta is the appropriate measure of riskto use in decision

making since risk-averse investors do not hold stocks in isolation. A’5° AV3?ab’° W

English Hardcopy Black 8. White

Learning objective:

Tnin case will allow nlnnnnln in in Un nnlnlnn n and nnnnlinl inn links nnnnnlnln n wiln in nivi nnnl nlnnnn nnn
portfolios. ‘.7 Calculate beta using linear regression. ‘? Understand the relationship between risk and return and

the Capital Asset Pricing Model (CAPlvl). This case is intended for an introductoryfinance class in the unit on risk

and return.

Subjects Covered:

Commodities; Portfolio management; Regression analysis; Risk management; Securities

Setting:

Geographiczunited States

ALEX SHARPE’S PORTFOLIO

Professor Colette Southam wrote mis case solely to provide material her class discussion. The author does not intend to illustrate
either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying
lnfomiation to protect confidentiality.

lvey Management Senrioes prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction a!
this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to
reproduce materials, contact my Publishing, tvey Management Services, do Richard tvey School of Business, The University o!
Western Ontario. London. Ontario. Canada N6A 3K7: phone (519) 661-3208: fax (519) 661-3882: e-mall cases@lvey.uwo.ca.
Copyright 6 2008. my Management Services Version: (A) 2008-07-11
On Friday, January 26, 2007, Alex Sharpe sat 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 ‘market portfolio‘ because no other portfolio can offer the same expected return at a lower risk. Since
the Standard & Poor’s (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 factors. This index is meant to reflect the risk/return characteristics of large-cap stocks. The S&P
500 is a market-value-weighted index, i.e., each stock’s weight in the index is proportionate to its market
value. 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‘ in order to provide themselves with a broad
market exposure without buying 500 different stocks.

Indexing represents a form of passive fund management that offers a low management expense ratio and
had historically outperformed most actively managed mutual funds. Vanguard is one of the world’s largest
equity and fixed income managers, and had been credited with the popularization of index funds and with
the driving down of costs across the mutual fund industry. Vanguard is unique in that it is owned by the
funds 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 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:

Exchange traded funds (ETFS) linked to underlying indices otter many of the same advantages as the low-cost. passively
managed index funds. One of the reasons for their increasing popularity is that they allow for inhaday trading, but for the
long-term investor, they offer no real advantage over index funds.

Page 2 9Bo8No20
Hasbro (NYSE: HAS) was an American toy and game company that was the second largest toy maker in
the world. next to Mattel. Industry sources expected Hasbro to introduce several innovative toys linked to
summer 2007 block 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 and produced by Tom DeSanto (X-E and X2: X-Men United) were scheduled to
open in summer 2007.

RJ. Reynolds Tobacco Company (RJR) was the second-largest tobacco firm in the world, with a share of
approximately 30 per cent of the U.S. cigarette market. RJ. Reynolds was a wholly owned subsidiary of
Reynolds American Inc. (NYSE: RAI). The company faced some unique challenges; for example. most
consumer-product companies did not have to spend millions of dollars annually on advertising aimed at
discouraging use of their product for consumers under the age of IS. RJ. Reynolds had been subject to
significant litigation for many decades, but 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 successfiil litigation record.

RISK AND RETURN

The last five years‘ worth of monthly returns for the Vanguard 500 Index Fund, Hasbro and RJ. Reynolds
are provided in Exhibit 1. In addition to comparing 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 of her new portfolio would provide
adequate compensation for taking on any new risky assets.

case study

Develop an essay focusing on the chosen case study.

Required discussion point for the essay

You are required to identify, explore and critically analyse the case study by addressing the following three (3) discussion points and link them to the chosen case study:

A comprehensive understanding of mental health, mental illness and the principles of recovery relating to the chosen case study.

The nexus between mental health with physical health within the case study.

Recognising and responding to the mental health needs of the identified person, i.e. your essay must include implications for practice for you as a health professional.

case study

Develop an essay focusing on the chosen case study.

Required discussion point for the essay

You are required to identify, explore and critically analyse the case study by addressing the following three (3) discussion points and link them to the chosen case study:

A comprehensive understanding of mental health, mental illness and the principles of recovery relating to the chosen case study.

The nexus between mental health with physical health within the case study.

Recognising and responding to the mental health needs of the identified person, i.e. your essay must include implications for practice for you as a health professional.