Beta Management Company

Beta Management Company

Ren, Yue

Assignment Questions

1. Calculate the variability (standard deviation) of the stock returns of California REIT and Brown Group during the past two years. How variable are they compared with Vanguard Index 500 Trust? Which stock appears to be the riskiest?

|Vanguard |California |Brown |

|500 Trust |REIT |Group |

|0.046 |0.092 |0.082 |

SD of returns:

Both of the two stocks have higher standard deviation compared to that of VI500. California appears to be the riskiest.

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.

California REIT & Vanguard Brown Group & Vanguard

SD of returns: 0.0457 0.0461

In this case, Brown Group has a higher standard deviation. This is because standard deviation is used to measure stand-alone risks while Beta is what we use when measure the risk of a portfolio.

3. Perform a regression of each stock’s monthly returns on the Index returns to compute the beta of each stock. How does this relate to the situation described in Question #2 above?

California REIT Brown Group

Beta: 0.147 1.163

This group of data confirms our conclusion in #2 that California REIT has a lower systematic risk.

4. How might the expected return for each stock relate to its riskiness?...