Class of 2011 Abstract / OBJECTIVES: To assess the risk and return of publicly traded health insurance companies from 1986 through 2010.
METHODS: Risk and return was assessed on these companies by identifying them with SIC 6231 and 6234 (Accident and Health Insurance and Medical Service Plans) along with their presence on the CRSP database. Risk and return was analyzed via alpha and beta for SIC 632x, which were calculated utilizing the CAPM, Fama-French 3 Factor and Carhart 4 Factor econometric models. Risk and return was further assessed by calculating a Sharpe ratio along with determining annualized mean excess return and volatility for SIC 632x and the overall market. Lastly, cumulative price paths for both SIC 632x and the overall market were calculated and a Monte Carlo simulation analysis in Matlab and Microsoft Excel was run to simulate 6500 portfolios to compare risk to return ratios for SIC 632x over the time period of 1986-2010 versus the time period of 2006-2010.
RESULTS: Overall, 110 companies were identified with SIC 6321 and 6234 and 7938 observations were made. The results were reported in a cross sectional format with five time periods of five years each (1986-1990, 1991-1995, 1996-2000, 2001-2005, and 2006-2010 respectively). The descriptive statistics showed that SIC 632x had a higher rate of return than the overall market (1.21±14.15 compared to 0.88±4.49; however, they also had greater risk (0.89±14.15 vs 0.57±4.48). The CAPM model captured an overall alpha value of 0.44 while the 3 Factor model provided an overall alpha of -0.20 and the 4 Factor model provided an overall alpha of 0.31. The 4 Factor model had the highest overall r-squared value of 0.16. The overall annualized mean excess return was greater for SIC 632x than the overall market (10.71% vs 6.80%) while the volatility was also greater (20.30% vs 16.17%). Additionally, the Sharpe ratio was calculated and was greater overall for SIC 632x than the overall market (0.53 vs 0.42). Graphically, cumulative asset price paths were illustrated for both SIC 632x and market-based portfolios along with a mean variance efficient frontier for the SIC 623x portfolio set during the time periods of 1986-2010 and 2006-2010. These figures showed increased return for SIC 632x compared to the overall market while illustrating increasing risk and return rate trends for SIC 632x within the sector itself.
CONCLUSION: Publicly traded companies providing accident and health insurance and medical service plans possess securities that have potentially higher returns but potentially higher risk relative to the overall market. Furthermore, the findings via the alpha, Sharpe ratio and Efficient Frontier simulation illustrated that the overall market provides a similar risk to return ratio compared to that of the analyzed companies in this study.
| Identifer | oai:union.ndltd.org:arizona.edu/oai:arizona.openrepository.com:10150/614601 |
| Date | January 2011 |
| Creators | Clark, Jace, Skrepnek, Grant |
| Contributors | Skrepnek, Grant, College of Pharmacy, The University of Arizona |
| Publisher | The University of Arizona. |
| Source Sets | University of Arizona |
| Language | en_US |
| Detected Language | English |
| Type | text, Electronic Report |
| Rights | Copyright © is held by the author. |
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