Caso Beta Management

Public Policy 741 Case 2 (Beta Management Company) Questions

NOTE: Answers to these questions are due at the beginning of class on Monday, October 3, 2005. I highly recommend that you use EXCEL to complete this assignment. The investment return data listed on page 3 of the Beta Management Company case (in the coursepack) is available on the course webpage in an excel file.

1. 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?

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.

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

NOTE: To perform a regression in excel follow these simple steps:

1. from the Tools menu, choose the Data Analysis command

2. in the data analysis dialog box, scroll the list box, select Regression, and click O.K.

3. the Regression dialog box appears

4. in the regression dialog box, move from box to box using the mouse or the tab key

5. enter the y-range (in the excel spreadsheet this is c7:c30 for REIT and d7:d30 for Brown)

6. enter the x-range (in the excel spreadsheet this is b7:b30 for both regressions)

7. provide an regression output location: for example type f7

8. no need to select any of the other options available, click OK and the regression output will appear.

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