Beta Management

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CASE STUDY :
Beta Management Company

The Context

Beta Management Group is a small investment management company based in Boston. It was founded in 1988 by Ms. Sarah Wolfe (The founder and CEO of the Beta Management Group). Ms. Wolfe follows a market timing investment strategy based on two portfolios; the Vanguard index and money market instruments.

The goals of Beta Management were to enhance returns-but-reduce risks for clients via market timing. Majority of Beta’s funds was kept in no load, low-expense index funds, by adjusting level of market exposure between 50% and 99% in attempt to "time the-market." Sarah exclusively use of Vanguard's Index 500 Trust due to its extremely, low expense ratio and its success-at closely matching the return on the S&P 500 Index.

Ms. Wolfe focused initially on acquiring share of one of the two following stocks, reasoning that they were underpriced, as follows : * California REIT, whose stock price she considered to unduly depressed due to the World Series earth quake. * Brown Group, Inc. regarding this group, she remarks that its stock prices are sensitive to movements in the stock market, implying a beta that is positive to some significant degree. Ms. Wolfe felt that now was the right time to begin her program of adding individual stock investments and increasing her equity position. A $200,000 purchase of one of these stocks would increase her total equity exposure to $20 million

The Issues
Beta had lost some potential new clients who had thought it unusual that Beta Management used only an index mutual fund and picked none of its own stocks. Beta begin looking at some individual stocks for possible purchase for Beta's equity portfolio , but worried about variability of individual stock. Beta should decided to increase the proportion of Beta's assets in equities, by purchasing one of two stock (California R.E.I.T or Brown Group) with amount $200.000.

She felt the market was still a good value and that 1991 would be a good year. First step toward both of these goals, Ms. Wolfe was considering immediately increasing her equity exposure to 80% with the purchase of one of two stocks (California R.E.I.T or Brown Group) recommended by her newly hired analyst. Both were small NYSE-listed companies whose stock price had eroded over the past two years

The Analysis of Issues

First we have to evaluate the risk of Vanguard Index for 24 months : * Two measures of risk ; Standard deviation for measure a security considered individually, and the beta is the measure of the risk in the context of well diversified portfolio. * Standard Deviation

* By Excel use STEDV.S (data from Table1) Standard Deviation= 4,61 percent.

MONTH| Vanguard Index 500 Trust| California REIT| Brown Group| 1989- January| 7,32%| -28,26%| 9,16%|
Feb| -2,47%| -3,03%| 0,73%|
March| 2,26%| 8,75%| -0,29%|
April| 5,18%| -1,47%| 2,21%|
May| 4,04%| -1,49%| -1,08%|
June| -0,59%| -9,09%| -0,65%|
July| 9,01%| 10,67%| 2,22%|
August| 1,86%| -9,38%| 0,00%|
Sept| -0,40%| 10,34%| 1,88%|
Octo| -2,34%| -14,38%| -7,55%|
Nov| 2,04%| -14,81%| -12,84%|
Dec| 2,38%| -4,35%| -1,70%|
1990- January| -6,72%| -5,45%| -15,21%|
February| 1,27%| 5,00%| 7,61%|
March| 2,61%| 9,52%| 1,11%|
April| -2,50%| -0,87%| -0,51%|
May| 9,69%| 0,00%| 12,71%|
June| -0,69%| 4,55%| 3,32%|
July| -0,32%| 3,48%| 3,17%|
August| -9,03%| 0,00%| -14,72%|
Sept| -4,89%| -13,04%| -1,91%|
October| -0,41%| 0,00%| -12,50%|
Nov| 6,44%| 1,50%| 17,26%|
Dec| 2,72%| -2,56%| -8,53%|
σ (SD)| 4,61%| 9,23%| 8,17%|
Then, we evaluate the lower risk of the two new securities. If we look at Table 1, I notice the following things about California REIT and Brown group returns over 2 years ending in December 1990.

* California REIT have had lower average monthly...
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