Case Study

Beta Management Company

Raman Dhiman
INDIAN INSTITUTE OF MANAGEMENT (IIM), SHILLONG
For any queries pl contact: raman.pgpex12@iimshillong.in

Company Background

Beta Management Company was founded in 1988

Ms. Wolfe considered herself a market strategist, and Beta Management's stated goals were to enhance
returns but reduce risks for clients via market timing .
She would keep a majority of Beta's funds in no-load, low-expense index funds (with the remainder in money
market instruments), adjusting the level of market exposure between 50% and 99% of Beta's funds in an
attempt to "time the market."

Issue

Mrs. Wolfe also decided to increase the proportion of Beta's assets in equities, since she felt the market
was still a good value and that 1991 would be a good year.
As a first step toward both of these goals, Ms. Wolfe was considering immediately increasing her equity
exposure to 80% with the purchase of one of two stocks recommended by her newly hired analyst
Both were small NYSE-listed companies whose stock price had eroded over the past two years to levels
that seemed unreasonably low
She noticed that these stocks both seemed to bounce around in price much more than the market (or the
index fund), and she wondered if she was doing the right thing exposing her clients to these new risks

Analysis & Way forward

Month

Vanguard
California REIT
Index 500 Trust

Brown
Group

1989 - January
February
March
April
May
June
July
August
September
October
November
December
1090 - January
February
March
April
May
June
July
August
September
October
November
December

7.32
-2.47
2.26
5.18
4.04
-0.59
9.01
1.86
-0.4
-2.34
2.04
2.38
-6.72
1.27
2.61
-2.5
9.69
-0.69
-0.32
-9.03
-4.89
-0.41
6.44
2.72

-28.26
-3.03
8.75
-1.47
-1.49
-9.09
10.67
-9.38
10.34
-14.38
-14.81
-4.35
-5.45
5
9.52
-0.87
0
4.55
3.48
0
-13.04
0
1.5
-2.56

9.16
0.73
-0.29
2.21
-1.08
-0.65
2.22
0
1.88
-7.55
-12.84
-1.7
-15.21
7.61
1.11
-0.51
12.71
3.32
3.17
-14.72
-1.91
-12.5
17.26
-8.53

Average

1.1025

-2.265416667

-0.67125

Covariance & Beta Value

Covariance of
Beta Value for California Rate of
California REIT
2.996288542 Interest w.r.t. Vanguard rate of 0.14121179
w.r.t. Vanguard
interest
Covariance of
Beta Value for Brown Rate of
Brown Group w.r.t. 23.65590313 Interest w.r.t. Vanguard rate of 1.114876744
Vanguard
interest

Standard Deviation & Beta Value

Stock
Std DeviaZon
Beta Value

Vanguard
4.6

California
9.2
0.14121179

Brown
8.1
1.114876744

First cut analysis:

Risk value of California stock & Brown stock is twice
that of Vanguard.
From the Beta Value, the Brown share is more riskier
than California.
** Pl refer further analysis

Results of Regression California & Vanguard

SUMMARY OUTPUT
Regression Sta-s-cs
MulZple R

0.07353166

R Square
Adjusted R
Square
Standard
Error
ObservaZon
s

0.005406905

ANOVA

Regression
Residual
Total

Intercept
X Variable 1

-0.039801872
9.412643861
24

df
1
22
23
Coecients

SS
MS
F
Signicance F
10.59617781 10.59617781 0.119598569
0.732755502
1949.153018 88.59786446
1959.749196


Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

-2.427871621

1.977939832 -1.227474962 0.232616969

-6.529867769

1.674124527 -6.529867769

1.674124527

0.147351433

0.426080217 0.345830261 0.732755502

-0.736284855

1.03098772 -0.736284855

1.03098772

Take away: Since the value of Significance F is more than 0.05, so it means that the Probability that an equation used will not
explain the similar relationship between the subject stocks is 27%.
Therefore, we do not have a meaningful correlation
Moreover the P Value is also more than 0.05, means that the variable X i.e. Vanguard do not really influences Brown.

Results of Regression Brown & Vanguard

SUMMARY OUTPUT
Regression Sta-s-cs
MulZple R
0.656169766
R Square
0.430558762
Adjusted R Square
0.40467507
Standard Error
6.301260285
ObservaZons
24
ANOVA

Regression
Residual
Total

Intercept
X Variable 1

df

SS
MS
F
Signicance F
1 660.4820765 660.4820765 16.6343639 0.000498022
22 873.529386 39.70588118
23 1534.011463

Coecients
Standard Error
t Stat
P-value
Lower 95% Upper 95% Lower 95.0% Upper 95.0%
-1.953842984 1.324124645 -1.475573309 0.154228174 -4.699909424 0.792223455 -4.699909424 0.792223455
1.163349646 0.285237856 4.078524721 0.000498022 0.571802539 1.754896753 0.571802539 1.754896753

In this case the value of significance F is less than 0.05, So the correlation is meaningful.
Moreover the P Value is also less than 0.05, means that the variable X i.e. Vanguard really influences Brown.

Weighted Average Portfolio Risks

Weighted Average Risk in a porKolio of Vanguard & California (PorKolio 1)
Parameter
Weight
Std Dev(Risk)
Average
Vabguard Fund
0.98989899 4.606343688
4.559814964
California
0.01010101 9.230735982
0.093239757

Average Risk %
4.653054721
Weighted Average Risk in a porKolio of Vanguard & Brown (PorKolio 2)
Parameter
Weight
Std Dev(Risk)
Average
Vabguard Fund
0.98989899 4.606343688
4.559814964
California
0.01010101 8.166771121
0.082492638

Average Risk %
4.642307602

Take Away: From Weighted average calculations,

Portfolio 1 is more risky than Portfolio 2
Note: We can not find here the risk through 2X2
matrix, as from regression analysis, the value of
Significance F and P Value are more than
0.05. So the correlation between California &
Vanguard fund is irrelevant.

Weighted Average Portfolio Returns

Weighted Average Returns in a porKolio of Vanguard & California (PorKolio1)
Parameter
Weight
Return
Average
Vabguard Fund
0.98989899 1.1025
1.091363636
California
0.01010101 -2.265416667
-0.022882997

Average Returns %
1.06848064
Weighted Average Returns in a porKolio of Vanguard & Brown (PorKolio 2)
Parameter
Weight
Return
Average
Vabguard Fund
0.98989899 1.1025
1.091363636
California
0.01010101 -0.67125
-0.006780303

Average Returns % 1.084583333

Take Away: From Weighted average calculations,

Portfolio 2 is giving more returns than Portfolio 1

Rate of returns from Capital Asset Pricing Model

R=rf +(rm -rf )

Rf Taken a 6% (RBI Rate of Return). Value may be taken as required.
Poreolio
Poreolio 1
Poreolio 2

Rf
6
6

Beta Value
0.14121179
1.114876744

Poreolio Return R (Return from CAPM method)

1.06848064
6.696388674
1.084583333
11.48008373

Take away: Portfolio 2 will provide us more return than Portfolio 1

Thank You