Alex Sharpe's Portfolio Case Study Solution
Monthly/Annual Variance
The monthly variance is high in the last five years security of AMZN and McD, and annual variance is high in the last five years’ security of AMZN and BA. The monthly variance is high in the last ten years’ security of AMZN and F, and annual variance is high in the last five years security of AMZN and F. The monthly variance is high in the last twenty years’ security of AMZN and F;whereas, the annual variance is high in the last five years security of AMZN and F.
The monthly variance is high in the last five years portfolio of AMZN, F, and BAand annual variance is high in the last five years portfolio of AMZN, F, and BA. The monthly variance is high in the last ten years Portfolio of AMZN, F, and BA,whereas; the annual variance is high in the last five years Portfolio of AMZN, F, and BA. The monthly variance is high in the last twenty years Portfolio of AMZN, BA,and F, and annual variance is high in the last five years security of AMZN, BA,and F.This is also shown in table 2
Beta
The beta of S&P is 1, AMZN is 0.12 and so on. Table 3 shows that the Beta is used for CAPM,indicating towards the relation of risk and expected return of the stock. As the risk is higher in S&P, AMZN, BA, and MCD; the return will also be higher in these securities.
Table 3
| Date and Share Pricing Data | ||||||
| Date | SPY - S&P500 ETF | AMZN | PG | F | BA | McD |
| Intercept | 0 | 90.24 | 0.84 | 81.36 | 71.21 | 55.12 |
| Slope | 1 | 0.12 | 2.60 | 5.98 | 0.65 | 1.22 |
Intercept
Intercept is also shown in table 3. It is calculated by using the intercept formula in excel. It shows the minimum price of the security.
Expected rate of return
The expected and actual returns have been calculated by CAPM. The CAPM shows the relation between expected returns. CAPM is calculated with RF and Beta. Annual RF of 2020 as well asthe annual market rate of 2020, are calculated with the current risk-free rate and the current rate of return by multiplying with 12.
| beta | Expected return | Actual return | |
| SPY - S&P500 ETF | 1 | 5.41% | 7.14% |
| AMZN | 0.12 | 2.01% | 28.01% |
| PG | 2.60 | 11.58% | 9.32% |
| F | 5.98 | 24.62% | 7.52% |
| BA | 0.65 | 4.07% | 16.19% |
| McD | 1.22 | 6.27% | 13.15% |
SML
This has been constructed with the expected/actual return and beta. Those dots that are above the security market line are the undervalued stock and those which are below the SML, are overvalued stock. It is a geographical representation, which showsdifferent market risks that are plotted against the expected return.
Recommendations
The security market line shows that the undervalued stocks are better to invest as their returns is higher. This means, Alex Sharpe should invest in AMZA, BA, McD and SPY because these securities are above or on the SML. She can also invest in PG; however, it is overvalued but the expected rate of return is not high with a higher percentage.Moreover, F is not recommended to invest in, as the expected rate of return is 25% but the actual return is 7.5%.....................................
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