Beta management company solution HBS Case Study
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Financial Markets - Investments, Solution for Beta Management Company Solutions. May not be 100 % accurate, but identifies an important point in case study.
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Beta management company solution HBS Case Study
- 1. Case Study Beta Management Company Raman Ā Dhiman Ā INDIAN Ā INSTITUTE Ā OF Ā MANAGEMENT Ā (IIM), Ā SHILLONG Ā For Ā any Ā queries Ā pl Ā contact: Ā raman.pgpex12@iimshillong.in Ā
- 2. Company Background ā¢āÆ ā¢āÆ 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." ā¢āÆ Issue ā¢āÆ ā¢āÆ ā¢āÆ ā¢āÆ 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
- 3. Analysis & Way forward Month Ā Vanguard Ā Ā California Ā REIT Ā Index Ā 500 Ā Trust Ā Brown Ā Group Ā 1989 Ā -Āā Ā January Ā February Ā March Ā April Ā May Ā June Ā July Ā August Ā September Ā October Ā November Ā December Ā 1090 Ā -Āā Ā January Ā February Ā March Ā April Ā May Ā June Ā July Ā August Ā September Ā October Ā November Ā December Ā 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 Ā 1.1025 Ā -Āā2.265416667 Ā -Āā0.67125 Ā Covariance & Beta Value Covariance Ā of Ā Beta Ā Value Ā for Ā California Ā Rate Ā of Ā California Ā REIT Ā 2.996288542 Ā Interest Ā w.r.t. Ā Vanguard Ā rate Ā of Ā 0.14121179 Ā w.r.t. Ā Vanguard Ā interest Ā Covariance Ā of Ā Beta Ā Value Ā for Ā Brown Ā Rate Ā of Ā Brown Ā Group Ā w.r.t. Ā 23.65590313 Ā Interest Ā w.r.t. Ā Vanguard Ā rate Ā of Ā 1.114876744 Ā Vanguard Ā interest Ā Standard Deviation & Beta Value Stock Ā Std Ā DeviaZon Ā Beta Ā Value Ā Vanguard Ā 4.6 Ā Ā California Ā 9.2 Ā 0.14121179 Ā Brown Ā Ā 8.1 Ā 1.114876744 Ā First cut analysis: ā¢āÆ Risk value of California stock & Brown stock is twice that of Vanguard. ā¢āÆ From the Beta Value, the Brown share is more riskier than California. ** Pl refer further analysis
- 4. Results of Regression ā California & Vanguard SUMMARY Ā OUTPUT Ā Regression Ā Sta-s-cs Ā MulZple Ā R Ā 0.07353166 Ā R Ā Square Ā Adjusted Ā R Ā Square Ā Standard Ā Error Ā ObservaZon s Ā 0.005406905 Ā ANOVA Ā Ā Regression Ā Residual Ā Total Ā Ā Intercept Ā X Ā Variable Ā 1 Ā -Āā0.039801872 Ā 9.412643861 Ā 24 Ā df Ā 1 Ā 22 Ā 23 Ā Coeļ¬cients Ā SS Ā MS Ā F Ā Signiļ¬cance Ā F Ā 10.59617781 Ā 10.59617781 Ā 0.119598569 Ā 0.732755502 Ā 1949.153018 Ā 88.59786446 Ā 1959.749196 Ā Ā Ā Ā Ā Ā Ā Standard Ā Error Ā t Ā Stat Ā P-Āāvalue Ā Lower Ā 95% Ā Upper Ā 95% Ā Lower Ā 95.0% Ā Upper Ā 95.0% Ā -Āā2.427871621 Ā 1.977939832 Ā -Āā1.227474962 Ā 0.232616969 Ā -Āā6.529867769 Ā 1.674124527 Ā -Āā6.529867769 Ā 1.674124527 Ā 0.147351433 Ā 0.426080217 Ā 0.345830261 Ā 0.732755502 Ā -Āā0.736284855 Ā 1.03098772 Ā -Āā0.736284855 Ā 1.03098772 Ā Take away: Since the value of āSignificance Fā 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 āP Valueā is also more than 0.05, means that the variable X i.e. Vanguard do not really influences Brown.
- 5. Results of Regression ā Brown & Vanguard SUMMARY Ā OUTPUT Ā Regression Ā Sta-s-cs Ā MulZple Ā R Ā 0.656169766 Ā R Ā Square Ā 0.430558762 Ā Adjusted Ā R Ā Square Ā 0.40467507 Ā Standard Ā Error Ā 6.301260285 Ā ObservaZons Ā 24 Ā ANOVA Ā Ā Regression Ā Residual Ā Total Ā Ā Intercept Ā X Ā Variable Ā 1 Ā df Ā SS Ā MS Ā F Ā Signiļ¬cance Ā F Ā 1 Ā 660.4820765 Ā 660.4820765 Ā 16.6343639 Ā 0.000498022 Ā 22 Ā 873.529386 Ā 39.70588118 Ā 23 Ā 1534.011463 Ā Ā Ā Ā Ā Ā Ā Coeļ¬cients Ā Standard Ā Error Ā t Ā Stat Ā P-Āāvalue Ā Lower Ā 95% Ā Upper Ā 95% Ā Lower Ā 95.0% Ā Upper Ā 95.0% Ā -Āā1.953842984 Ā 1.324124645 Ā -Āā1.475573309 Ā 0.154228174 Ā -Āā4.699909424 Ā 0.792223455 Ā -Āā4.699909424 Ā 0.792223455 Ā 1.163349646 Ā 0.285237856 Ā 4.078524721 Ā 0.000498022 Ā 0.571802539 Ā 1.754896753 Ā 0.571802539 Ā 1.754896753 Ā In this case the value of āsignificance Fā is less than 0.05, So the correlation is meaningful. Moreover the āP Valueā is also less than 0.05, means that the variable X i.e. Vanguard really influences Brown.
- 6. Weighted Average Portfolio Risks Weighted Ā Average Ā Risk Ā in Ā a Ā porKolio Ā of Ā Vanguard Ā & Ā California Ā (PorKolio Ā 1) Ā Parameter Ā Weight Ā Std Ā Dev(Risk) Ā Average Ā Vabguard Ā Fund Ā 0.98989899 Ā 4.606343688 Ā 4.559814964 Ā California Ā 0.01010101 Ā 9.230735982 Ā 0.093239757 Ā Ā Average Ā Risk Ā % Ā 4.653054721 Ā Weighted Ā Average Ā Risk Ā in Ā a Ā porKolio Ā of Ā Vanguard Ā & Ā Brown Ā (PorKolio Ā 2) Ā Parameter Ā Weight Ā Std Ā Dev(Risk) Ā Average Ā Vabguard Ā Fund Ā 0.98989899 Ā 4.606343688 Ā 4.559814964 Ā California Ā 0.01010101 Ā 8.166771121 Ā 0.082492638 Ā Ā Average Ā Risk Ā % Ā 4.642307602 Ā 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 āSignificance Fā and āP Valueā are more than 0.05. So the correlation between California & Vanguard fund is irrelevant. Weighted Average Portfolio Returns Weighted Ā Average Ā Returns Ā in Ā a Ā porKolio Ā of Ā Vanguard Ā & Ā California Ā (PorKolio1) Ā Parameter Ā Weight Ā Return Ā Average Ā Vabguard Ā Fund Ā 0.98989899 Ā 1.1025 Ā 1.091363636 Ā California Ā 0.01010101 Ā -Āā2.265416667 Ā -Āā0.022882997 Ā Ā Average Ā Returns Ā % Ā 1.06848064 Ā Weighted Ā Average Ā Returns Ā in Ā a Ā porKolio Ā of Ā Vanguard Ā & Ā Brown Ā (PorKolio Ā 2) Ā Parameter Ā Weight Ā Return Ā Average Ā Vabguard Ā Fund Ā 0.98989899 Ā 1.1025 Ā 1.091363636 Ā California Ā 0.01010101 Ā -Āā0.67125 Ā -Āā0.006780303 Ā Ā Average Ā Returns Ā % Ā 1.084583333 Ā Take Away: From Weighted average calculations, Portfolio 2 is giving more returns than Portfolio 1
- 7. Rate of returns from Capital Asset Pricing Model R=rf +Ī²(rm -rf ) Rf ā Taken a 6% (RBI Rate of Return). Value may be taken as required. Poreolio Ā Poreolio Ā 1 Ā Poreolio Ā 2 Ā Rf Ā 6 Ā 6 Ā Beta Ā Value Ā 0.14121179 Ā 1.114876744 Ā Poreolio Ā Return Ā R Ā (Return Ā from Ā CAPM Ā method) Ā 1.06848064 Ā 6.696388674 Ā 1.084583333 Ā 11.48008373 Ā Take away: Portfolio 2 will provide us more return than Portfolio 1