Case:%20Beta%20Management

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Case Beta Management

• Week 6

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The Objectives

• 1. To gain practice in calculating risk and
  return measures on stocks and portfolios,
  including estimation of beta for stocks by simple
  regressions.
• 2. To understand concepts of total risk,
  portfolio risk, diversifiable and
  undiversifiable risk, and how these relate to the
  beta.
• 3. To gain an appreciation of the relation
  between risk and return, and the CAPM.
• 4. To allow an introductory discussion of
  investment strategies.

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The Issues

• 1. The Strategy
• 2. The Choices
• 3. The Risks
• 4. The Return

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The Strategy

• How should we describe Ms. Wolfes portfolio
  management strategy?
• Where is she adding value?
• Why do you think she is following her existing
  strategy? Why is she changing?

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The Choices

• What is her goal in investing in the stocks shes
  considering?
• Why these stocks?

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The Risks

• 1. The total risk the standard deviation of each
  stock/fund.
• Vanguard 15.96, REIT 32, Brown28.30.
• 2. The portfolio risk 99 Vanguard 1 Stock.
• REIT 15.82 Brown 15.98.
• 3. The beta (the risk that is not diversifiable)
• REIT0.147(t statistic0.34).
• Brown1.16 (t statistic4.08).
• What is the relevant risk?

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What Is the Economic Significance?

• Consider the dollar impact on existing portfolio
  when the new asset is added.
• Current investment 19.8 M in index fund of
  volatility, with volatility of 15.96. In terms
  of dollars, the volatility is 0.159619.8 3.16
  M.
• If additional 200 K is invested in Brown, the
  new dollar volatility is 0.1598x203.196M, and
  dollars at risk increase by 36,000
  (3,196,000-3,160,000).
• If additional 200 K is invested in the
  California REIT, the dollars at risk decrease by
  400.
• If additional 200 K is invested in index itself,
  the dollars at risk increase by 31,920.
• Approximate beta of California REIT
  400/31,9200.125(From regression, beta 0.147).
• Approximate beta of Brown 36,000/31,9201.13
  (From regression, beta 1.16).

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The (Required) Returns

• 1. What expected return is sufficient to induce
  you to invest in either stock?

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Some Information of REITS(NAREIT,
http//www.nareit.com)

• REIT Real Estate Investment Trust.
• A REIT invests in income-producing property, and
  may also invest in loans on property.
• There are about 300 REITs, with about 2/3 traded
  on an exchange, and with assets over 300 B.
• Cumulative returns from 1/1/99 to 3/3/2003
• REIT40.67, SP500 -32.09.
• Volatility over 1/1/99 to 3/3/2003.
• REIT 11.71, SP 22.16.
• Correlation between returns over 1/1/99 to
  3/3/200 0.2843.
• REIT Index beta from daily data 0.15.

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