Beta Management
BETA MANAGEMENT COMPANY
Q1. Calculate the variability (standard deviation) of the stock returns of California REIT and Brown Group during the past 2 years. How variable are they compared with Vanguard Index 500 Trust? Which stock appears to be riskiest? The stock returns for each month are given in Table 1. Based on the monthly returns, the standard deviation or variability of each stock has been calculated. The standard deviation for California REIT is 9.23% and the standard deviation for Brown Group is 8.17%. This standard deviation is the monthly standard deviation for each of the stocks. On the other hand the standard deviation of Vanguard Index 500 Trust is 4.61%. This shows that the standard deviation of both the individual stocks is double of the standard deviation of the market. Based on the standard deviation of both the stocks, it can be concluded that the California REIT stock is more risky as compared to Brown Group. This shows that the returns of the California REIT stock disperse or deviate more frequently as compared to its average means. This means that the returns are volatile for this stock and therefore, this stock is the riskiest.
Q 2. Suppose Beta’s position had been 99% of equity funds invested in the index fund, and 1% in the individual stock. Calculate the variability of this portfolio using each stock. How does each stock affect the variability of the equity investment, and which stock is riskiest? Explain how this makes sense in view of your answer to Question #1 above. Ms. Wolfe is now planning to invest her $ 200,000 in either Brown Group stock or California REIT stock. In this way she would make her exposure of equity to $ 20 million of the total investment of $ 25 million. However, for the purpose of performing the calculations for the portfolio’s standard deviation we will work on the weight ages of the investments in the Vanguard trust and the respective stocks. If we assume that 99% of Ms. Wolfe’s total equity exposure will
Q1. Calculate the variability (standard deviation) of the stock returns of California REIT and Brown Group during the past 2 years. How variable are they compared with Vanguard Index 500 Trust? Which stock appears to be riskiest? The stock returns for each month are given in Table 1. Based on the monthly returns, the standard deviation or variability of each stock has been calculated. The standard deviation for California REIT is 9.23% and the standard deviation for Brown Group is 8.17%. This standard deviation is the monthly standard deviation for each of the stocks. On the other hand the standard deviation of Vanguard Index 500 Trust is 4.61%. This shows that the standard deviation of both the individual stocks is double of the standard deviation of the market. Based on the standard deviation of both the stocks, it can be concluded that the California REIT stock is more risky as compared to Brown Group. This shows that the returns of the California REIT stock disperse or deviate more frequently as compared to its average means. This means that the returns are volatile for this stock and therefore, this stock is the riskiest.
Q 2. Suppose Beta’s position had been 99% of equity funds invested in the index fund, and 1% in the individual stock. Calculate the variability of this portfolio using each stock. How does each stock affect the variability of the equity investment, and which stock is riskiest? Explain how this makes sense in view of your answer to Question #1 above. Ms. Wolfe is now planning to invest her $ 200,000 in either Brown Group stock or California REIT stock. In this way she would make her exposure of equity to $ 20 million of the total investment of $ 25 million. However, for the purpose of performing the calculations for the portfolio’s standard deviation we will work on the weight ages of the investments in the Vanguard trust and the respective stocks. If we assume that 99% of Ms. Wolfe’s total equity exposure will