Beta Management Company

Topics: Standard deviation, Variance, Exchange-traded fund Pages: 2 (380 words) Published: December 2, 2012
Question 1:
To compute the standard deviation, it is used the EXCEL STDEV ( ) Function and the expected return is equal to the sum of return rates in 24 months divided by 24. Stock| Vanguard 500| California REIT| Brown Group|

Standard Deviation| 4.61%| 9.23%| 8.17%|
Expected Return| 1.10%| -2.27%| -0.67%|

Question 2:
To compute the standard deviation in a portfolio, it follows the formula SD= ( ) 1/2 First, it needs to get covariance, using the EXCEL COV ( ) Function Stock| California REIT| Brown Group|

Cov (Vanguard 500, Stock)| 0.03%| 0.24%|

SD of the portfolio (99% in Vanguard 500, 1% in California REIT) SD = [(0.99*.0461)2 + (0.01*.0923)2 + 2*0.99*0.01*0.0003]1/2 = 4.57%
SD of the portfolio (99% in Vanguard 500, 1% in Brown Group) SD = [(0.99*.0461)2 + (0.01*.0817)2 + 2*0.99*0.01*0.0024]1/2 = 4.61%
Brown Group stock will add more variability to the portfolio because the portfolio including Vanguard 500 and Brown Group stock has a higher standard deviation. Question 3:
Based on the results of question 1, California REIT stock is riskier because it has a larger SD. However, according to question 2, Brown Group stock is riskier. It should be Brow Grown stock muck riskier because the covariance between the Vanguard and Grown Group stock is most 8 times of that between the Vanguard and California REIT stock. The portfolio includes Grown Group stock is riskier. Question 4:

To compute Beta, it follows the formula

| California REIT| Grown Group|
Beta| 0.14| 1.16|

The result is consistent with question 3. The Grown Group stock has a higher beta so it is riskier. It is more sensitive to the market factor. Question 5:
The Grown Group stock should have a higher expected return because it is riskier. It is matched with the result in question 1. However, in the market, the riskiness of the stock...
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