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Summary of the book: Management Information Systems - Managing the Digitial Firm, 12th Edition (Global Edition) by Laudon. Made for the course Management Information Systems at the V…Descrição completa
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Es un indicador que se utiliza para estimar cuál es la volatilidad de un grupo de acciones
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BETA MANAGEMENT
Beta Management Introduction: Beta Management Company is a small investment management company.
They had
approximately 25 million million dollars when they started in 1991. Their company goal is to enhance returns but reduce risks for for clients via market market timing. Initially Beta¶s funds were invested into into the Vanguard 500, an S&P 500 no-load and low-expense index funds (with the remainder in money market instruments). instruments). The founder founder and CEO, Sarah Wolfe, adjusted adjusted the level level of market exposure from 50-99% of the fund. She tried tried to ³time ³time the market´ market´ and reduce exposure to the market by decreasing the percent of the investment that was allocated to the Vanguard 500 index.
When the market was about to go on an upswing they would invest more heavily in the index funds. Beta¶s performance was tied to Ms Wolfe¶s ability to predict predict the market. By 1991, Ms Wolfe decided it was time to invest invest in individual individual stocks stocks of smaller companies.
Based on
recommendations from stock market analysts they recommended that she take a look at California REIT and Brown Group. She hired two analysts for that purpose. California R.E.I.T¶s stock price closed at $ 21/4 per share and Brown Group, Inc.¶s price is $24. A $200,000 purchase of one of these stocks would increase her total equity exposure to $20 million. Still, she had some doubts but she promised her clients c lients of reasonable returns.
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Page 1
BETA MANAGEMENT
Q.1 Calculate the variability or Standard Deviation of the stock returns of California Reit and
Brown group during past two years, how variable they are in comparison with the Vinegar 500 index trust fund?
month 1989
Vanguard trust
jan
Index
500
California REIT
7.32%
Brown Group
-28.26%
9.16%
1989feb
-2.47%
-3.03%
0.73%
1989mar
2.26%
8.75%
-0.29%
1989apr
5.18%
-1.47%
2.21%
1989may
4.04%
-1.49%
-1.08%
1989
jun
-0.59%
-9.09%
-0.65%
1989
july
9.01%
10.67%
2.22%
1989aug
1.86%
-9.38%
0.00%
1989sep
-0.40%
10.34%
1.88%
1989oct
-2.34%
-14.38%
-7.55%
1989nov
2.04%
-14.81%
-12.84%
1989dec
2.38%
-4.35%
-1.70%
1990
jan
1990feb
1.27%
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-6.72%
-5.45%
5.00%
-15.21%
7.61%
Page 2
BETA MANAGEMENT 1990mar
2.61%
9.52%
1.11%
1990apr
-2.50%
-0.87%
-0.51%
1990may
9.69%
0.00%
12.71%
1990
jun
-0.69%
4.55%
3.32%
1990
july
-0.32%
3.48%
3.17%
1990aug
-9.03%
0.00%
-14.72%
1990sep
-4.89%
-13.04%
-1.91%
1990oct
-0.41%
0.00%
-12.50%
1990nov
6.44%
1.50%
17.26%
1990dec
2.72%
-2.56%
-8.53%
S.D
4.61%
9.23%
8.17%
The variability of both California REIT and Brown Group is double as compare to the Vanguard 500 Index Trust.
According to the calculation we have found fo und the following information:
Stock Standard deviation
Vanguards Vanguards Index 4.505138713%
California Reit 9.03638%
Brown Group 8.17%
After making the comparison we have found that the Stock California Reit is more risky than Brown Group because the standard deviation of that group is more than the brown group so
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BETA MANAGEMENT the Brown Group will be much better for investment which is less risky based on the standard deviation. Question.2
The variability of the portfoli po rtfolio o with w ith r in asset one and 1-w in asset 2 is:
The covariance will help us in the determination of risk ness of the stock: The covariance¶s are: Stock
Cal. Reit
Brown Group
Covariance (Vanguards Index, Stock)
0.0003
0.0024
Variability (Standard Deviation) of the portfolio (99%Vanguard, 1% Cal. REIT) = [(.99²) (.0461²) + 2(.99) (.01) (.0003) + (.01²)(.0923²)]1/2 = 4.57% The Variability (Standard Deviation) of the portfoli po rtfolio o (99%Vanguard, 1% Brown Group) = [(.99²) (.0461²) + 2(.99) (.01) (.0024) + (.01²) (.0817²)] 1/2 = 4:61% Comparing these portfolios, we see that the Brown stock adds more variability to the Portfolio. Thus, Brown is riskier. This answer differs from that in part (a) because a large part of the portfolio's risk is related to the covariance between the individual stock and Vanguard. We variability of ach security has been measured which gives us more accurate result. Since the Covariance between Brown's stock and Vanguard is almost 8 times that between Cal.REIT and Vanguard, the portfolio that includes Brown is riskier.
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BETA MANAGEMENT
Question.3
How the expected return for each stock might relates to its riskiness? As we know the rule higher the risk higher the return, as in part 2 we have find Brown is more risky than California REIT that¶s why it will have high return on other hand the California has the less return because of less variability in the portfolio. Because investors wants to have a diversifiable portfolio portfolio that¶s t hat¶s why they want the result in portfolio context. co ntext. Stock
Beta
Cal. Reit
0.1474
Brown Group
1.6633
The Higher the Beta the t he Higher risk.
Capital Asset Pricing Model: (CAPM) A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.
Assumed that risk free rate is 6% then:
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BETA MANAGEMENT
California
r = RF + (rm-rf) r=0.03+ (4.505139-0.03)0.1474 r=0.6896
Brown Group
r= RF+ (rm-rf) r=0.03+(4.505139-0.03)1.6633 r=7.4735 The return of brown is greater than t han calfornia because the risk of the brown is greater.
