Professional Documents
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Andrew Smith
Scott Newell
Chris Perkins
Sarah Wolfe was the founder and CEO of the Beta Management Group, a small
investment company. Beta Management’s stated goals were to enhance returns but reduce
risks for clients via market timing. Due to the small size of Ms. Wolfe’s accounts, she
decided to keep 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.” She would put the remainder in money market instruments.
Sarah Wolfe’s problem with the original investment strategy was that she was
losing potential new clients. These clients found it unusual that Beta Management used
single index mutual funds and picked none of its own stocks. Another problem Ms.
Wolfe encountered was she shifted her equity to 80%, and this caused her clients to be
exposed to new risks. Ms. Wolfe is unsure of the two stocks because their price bounces
Ms. Wolfe’s investment strategy is to achieve diversify and eliminate some of the
diversifiable risk that comes with the market. Ms. Wolfe shifted her equity to 80%
lowering her debt to 20%. Debt Financing allows higher return on investments, but
equity financing is less risky. According to financial theory, Ms. Wolfe diversifying her
stand-alone investments. Over the past two years the average return for the Vanguard
Index 500 Trust is 1.10%, which is higher compared to the average returns of both stocks.
The standard deviation for the two stocks, California REIT and Brown Group, were
9.04% and 7.99% respectively. According to the standard deviation, California REIT
In order to determine which stock is the riskiest, we have taken the new equity to
debt ratio and used each stock to create two separate portfolios. After combining each
stock into a portfolio with the Vanguard Index 500 Trust, we calculated the average
return and standard deviation for both portfolios. The results show that Brown Group had
a negative effect on the variability and California REIT had a positive effect on
After performing a regression model for each stock using the monthly returns, we
calculated a beta for California REIT and Brown Group, .1917 and .3516 respectively.
This calculation proves that California REIT is still the less risky of the two stocks, but
this both risks are greatly reduced through diversification. These stocks are not strongly
correlated with the market, hence the low beta, which helps eliminate the market risk.
The regression model shows that Beta Management’s overall risk will be greatly reduced
by both stocks, but California REIT still carries the least amount of risk.
The expected returns calculated with Index and the two stocks, California REIT
and Brown Group, are 1.09% and 1.08%. These returns are both low which suggests that
the risk for both stocks is low, according to financial theory. California REIT’s return is
higher with a lower risk making it the more profitable and least risky choice.