Beta Management Company

HBS case no. 9-292-122

Case details
1) Jan 1991 - BMC had $25 mn.AUM.
2) BMC's satted goals were to enhance returns but reduce risks for clients via market timing.
3) BMC kept a majority of funds in no-load low-expense index funds with the balance in money market in
BMC used Vanguard's Index 500 Trust due to its extremely low expense ratio and its success at closely m
4) As of Jan 4, 1991 BMC had 79.2% of $25 mn invested in Vanguard fund.
5) New year resolution was to look for some individual stocks for possible purchase for MC's equity portf
proportion of equities as the market was still a good value.
6) BMC considering two NYSE-listed companies, California REIT and Brown Group since their prices seem
7) california REIT was an extremely volatile stock and price was $2.25 as on Jan 4, 1991.
8) Brown Group stock price seemed quite variable and price was $24 as on Jan 4, 1991.

Exhibits
1) Investment return data
2) Monthly returns of California REIT vs S&P 500 Index Fund
3) Monthly returns of Brown Group Inc. vs S&P 500 Index Fund

Case questions
1) Calculate the standard deviation of stock returns of California REIT and Brown Group during the past 2
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 individ
using each stock. How does each stock affect the variability of the equity investment, and which stock is
Explain how this makes sense in view of your answer to Q1 above.
3) Perform a regression of each stocl's monthly returns on the index returns to compute the beta for eac
How does this relate to the situation described in Q2 above?
4) How might the expected return for each stock relate to its riskiness?
via market timing.
he balance in money market instruments.
tio and its success at closely matching the return on the S&P 500 Index.

purchase for MC's equity portfolio. Focus was on smaller stocks. Also to increase

Group since their prices seemed unreasonably low.

n Jan 4, 1991.
Jan 4, 1991.

Brown Group during the past 2 years.

ock appears to be riskiest?
dex fund and 1% in the individual stock. Calculate the variability of the portfolio
nvestment, and which stock is riskiest?

ns to compute the beta for each stock.

 ANALYSIS
Monthly Returns
Month California REIT Brown Group Vanguard Index
1989 - January -28.26% 9.16% 7.32%
Februar -3.03% 0.73% -2.47%
y
March 8.75% -0.29% 2.26%
April -1.47% 2.21% 5.18%
May -1.49% -1.08% 4.04%
June -9.09% -0.65% -0.59%
July 10.67% 2.22% 9.01%
August -9.38% 0.00% 1.86%
Septem 10.34% 1.88% -0.40%
ber
October -14.38% -7.55% -2.34%
Novemb -14.81% -12.84% 2.04%
er
Decemb -4.35% -1.70% 2.38%
er
1990 - January -5.45% -15.21% -6.72%
Februar 5.00% 7.61% 1.27%
y
March 9.52% 1.11% 2.61%
April -0.87% -0.51% -2.50%
May 0.00% 12.71% 9.69%
June 4.55% 3.32% -0.69%
July 3.48% 3.17% -0.32%
August 0.00% -14.72% -9.03%
Septem -13.04% -1.91% -4.89%
ber
October 0.00% -12.50% -0.41%
Novemb 1.50% 17.26% 6.44%
er
Decemb -2.56% -8.53% 2.72%
er
Std. 9.231% 8.167% 4.606%
Dev.
Correl with VG 0.074 0.656
Beta 0.147 1.163
Intercept -0.024 -0.020

Relationship CAL REIT = -0.024+0.147*VG Index Brown = -0.020+1.163*VG Index

R Square 0.005 0.431

Q1 Calculate the standard deviation of 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?
The figures are as shown above. CAL REIT is riskiest.

Q2 Suppose Beta's position had been 99% of equity funds invested in the Index fund and 1% in the individual stock. C
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 Q1 above.
The portfolio total risk figures are as shown above.
Portfolio risk reduces with CAL REIT but increases with Brown vis-à-vis 100% VG index due higher correlation with B
Q3 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 Q2 above?
Beta figures are as shown above.
Total risk (sd) 9.23% 8.17%
Sys risk (sd) 0.68% 5.36%
Unsys risk (sd) 9.21% 6.16%

Q4 How might the expected return for each stock relate to its riskiness?
CAL REIT return is on account of low sys risk but high unsys risk.
BG return is on account of near equal amounts of sys and unsys risks.
 Portfolio Returns
99% VG + 1% Cal REIT 99% VG + 1% BG
6.96% 7.34%
-2.48% -2.44%
2.32% 2.23%
5.11% 5.15%
3.98% 3.99%
-0.68% -0.59%
9.03% 8.94%
1.75% 1.84%
-0.29% -0.38%
-2.46% -2.39%
1.87% 1.89%
2.31% 2.34%
-6.71% -6.80%
1.31% 1.33%
2.68% 2.60%
-2.48% -2.48%
9.59% 9.72%
-0.64% -0.65%
-0.28% -0.29%
-8.94% -9.09%
-4.97% -4.86%
-0.41% -0.53%
6.39% 6.55%
2.67% 2.61%

4.568% 4.614%

Brown = -0.020+1.163*VG Index

and Brown Group during the past 2 years.

Which stock appears to be riskiest?

he Index fund and 1% in the individual stock. Calculate the variability of the portfolio
equity investment, and which stock is riskiest?

is 100% VG index due higher correlation with BG. BG now appears riskier.
eturns to compute the beta for each stock.