Beta Management Company
Beta Management Introduction: Sarah Wolfe of Beta Management Company, a small investment company near Boston, decided to expand her business after acquiring the clientele and assets she needed. In 1990, she had been successful in the management of Beta’s funds by focusing on the Vanguard Index 500 Trust, even generating good returns in the worst of times. After doubling the size of Beta, she decided to pick some smaller stocks to go along with the index mutual fund. She also planned to increase the proportion of Beta’s assets in equities, sensing that 1991 was going to be a good year. ... Table 3: Beta of Stocks Stock Brown Group Cal REIT Beta 1. ... 14 A regression analysis was performed for each stock’s monthly return against the Vanguard 500 to compute the Beta for each stock. The Beta for the stocks was calculated using the following formula: Covariance (Stock, Vanguard 500) / Variance Vanguard 500 A stock’s Beta provides a proportional measure of the sensitivity of the stock’s rate of return to the rate of return for the market portfolio. If Beta equals 1, then the stock has the same risk as the market portfolio and increases and decreases similarly as the market portfolio. If Beta is greater than one, then the stock’s systematic risk is greater than the market portfolio’s since the asset increases or decreases more in comparison to the market portfolio. If Beta is less than one, then the stock’s systematic risk is less than the market portfolio’s and increases or decreases less in comparison to the market portfolio. ... 11) had a higher Beta than Cal REIT (0. ... Therefore, combining the Vanguard 500 and Cal REIT stock to create a portfolio will generate a smaller Beta value and less risk for an investor than a portfolio combining the Vanguard 500 and Brown Group.