Synopsis: Alex Sharpe is pondering her investment strategy for her childrens educational saving. Currently, this money was invested in the Vanguard 500 Index Fund, a no-load mutual fund constructed to track the performance of the S&P 500. In order to achieve higher returns, Sharpe had been considering changing her passive investment strategy to one that was more active.

Assignment: Provide a quick rundown of Alex Sharpes situation. Discuss Ms. Sharpes strategies and goals, how can she add value. Think about issues such as efficiency, risk-return, and how to add value. Include a recommendation of a portfolio make-up (weights, or even suggestions of other stocks).

Questions that need to be answered:

1. Estimate and compare the returns and variability of Reynolds and Hasbro with that of the S&P 500 Index. Which stock appears to be riskiest?

2. Suppose Sharpes position has been 99% of equity funds invested in the S&P 500 and either 1% in Reynolds or 1% in Hasbro. Estimate the resulting portfolio position. How does each stock affect the variability of the equity investment? How does this relate to your answer in question 1 above?

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

4. How might the expected return of each stock relate to its riskiness?

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

6. In what stock(s) (if any) should Sharpe Invest? Make a recommendation of what you would do if you were Alex Sharpe. Would you try something different?

Date	RF (in %)
Jan-02	1.65
Feb-02	1.73
Mar-02	1.79
Apr-02	1.72
May-02	1.73
Jun-02	1.70
Jul-02	1.68
Aug-02	1.62
Sep-02	1.63
Oct-02	1.58
Nov-02	1.23
Dec-02	1.19
Jan-03	1.17
Feb-03	1.17
Mar-03	1.13
Apr-03	1.13
May-03	1.07
Jun-03	0.92
Jul-03	0.90
Aug-03	0.95
Sep-03	0.94
Oct-03	0.92
Nov-03	0.93
Dec-03	0.90
Jan-04	0.88
Feb-04	0.93
Mar-04	0.94
Apr-04	0.94
May-04	1.02
Jun-04	1.27
Jul-04	1.33
Aug-04	1.48
Sep-04	1.65
Oct-04	1.76
Nov-04	2.07
Dec-04	2.19
Jan-05	2.33
Feb-05	2.54
Mar-05	2.74
Apr-05	2.78
May-05	2.84
Jun-05	2.97
Jul-05	3.22
Aug-05	3.44
Sep-05	3.42
Oct-05	3.71
Nov-05	3.88
Dec-05	3.89
Jan-06	4.24
Feb-06	4.43
Mar-06	4.51
Apr-06	4.60
May-06	4.72
Jun-06	4.79
Jul-06	4.95
Aug-06	4.96
Sep-06	4.81
Oct-06	4.92
Nov-06	4.94
Dec-06	4.85