Beta Case Study

25721 Investment Management BMC Case Study Student Name: Junwei Wang Student ID: 11516655 Class Time: 6 p. m. – 9 p. m. Tuesday Lecturer: Wing Bui Table of content Q 1. 1 Q 2. 1 Q 3. 2 Q 4. 2 Q 5. 3 Beta Management Company I. Case Background Beta Management Company was founded in 1988 by Ms. Wolfe. Beta Management Company is a small investment management company based in a Boston suburb. Beta Management Company was successful in 1989 and 1990. This success had brought in enough new money to double the size of the company. However, Ms.

Wolfe 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. Sarah Wolfe was considering Beta’s new goal and directions for coming year. II. A. Ms. Wolfe decided to follow “ index” to adjust equity market exposure. This is a good strategy due to that at the beginning of the foundation of the company, the size of her account was small and there were no much money for her to take a risk. The strategy she followed was the lowest risky way. Ms.

Wolfe kept a majority of Beta’s funds in no-load, low-expense index funds, adjusting the level of market exposure between 50% and 99% of Beta’s funds in an attempt to “time the market”. B. Ms. Wolfe now has decided to increase her equity exposure to 80% with the purchase of one of the California R. E. I. T. and Brown Group, Inc. While Ms. Wolfe wanted to extend her business, she found that some potential clients thought it unusual that Beta Management used only an index mutual fund and picked none of its own stocks, Ms. Wolfe was engaging her new strategy. Unlike before, Beta increase the equity exposure from 50% to 80%.

Beta used to have 1% to 50% debt and 50% to 99% equity. Now, the portfolio will become as 20% debt and 80% equity. And also based on the performance of the two stocks, they are both unsteady stocks which mean that the risk of the Beta’s portfolio will be increased. However, we can also found that the return will be much higher. C. Ms. Wolfe is a contrarian investor. Base on the performance of the two stocks, these two stocks were unsteady and the losses rate is much higher than the return rate. III. a. California R. E. I. T. was a real estate investment trust.

Their stock had been badly damaged by the “World series” earthquake of 1989. Base on the Figure 1, it is easily found that the performance of the stock is volatile. Although the trend is similar with the index trend, California R. E. I. T. was still in a bad position. b. Brown Group Inc. was one of the largest manufacturers and retailers of branded footwear, and had been undergoing a major restructuring program since 1989. The stock performed steady and positive. However, there was a significant drop in late 1989 and late 1990. IV. a. The average return of California R. E. I. T. is -2. 7% and the average return of Brown Group Inc. is -0. 67%. The standard deviation of California R. E. I. T. is 0. 092307 and the standard deviation of Brown Group Inc. is 0. 081668. The standard deviation of S&P index is 0. 46036. Compare with SP500, California R. E. I. T. is more risker. b. In portfolio SPC, the standard deviation is0. 046526 and in SPB the standard deviation is 0. 046419. And the incremental risk of SPC and SPB over a portfolio with 99% in the SP500 and 1% in a risk-free asset are 0. 409504 and 0. 409611. From the data we can see that the California R. E. I. T. affect the portfolio more.

The SP500 index is the safest stock and the California R. E. I. T. is still the risker stock. c. The regression of California R. E. I. T. ’s monthly return on index return was attached as Appendix 1. The coefficient is 0. 011856. The regression of Brown Group Inc. ’s monthly return on index return was attached as Appendix 2. The coefficient is 0. 013509. We can still find that the California R. E. I. T. is risker stock that affect the portfolio more. d. The return of SPC equals to 99%*E(Rindex)+1%*E(Rc) and the return of SPB equals to 99%*E(Rindex) + 1%*E(Rb) and the return of risk-free portfolio is 99%* E(Rindex) + 1%*E(Rf).

The excess return for SPC is 1%*E(Rf) -1%*E(Rc) and the excess return for SPB is 1%*E(Rf) -1%*E(Rb). From the expression, we can find that the excess return for each unit is the difference between the expected return of risk-free asset and the expected return of the stock. V. Summary * If the size of account is small, the safer way to maintain and adjust equity market exposure is “index”. * Create portfolio smarter; do not invest all money in single area. * The excess return of the stock is difference between the return rates. * When investing, index will be a good indication to predict the stock’s future trend.