Beta Management Company

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Beta Management Company Portfolio Risk & Return I. Statement of the problem 1. Which of the two stocks is riskier? 2. Should Ms. Wolfe purchase the stocks or not? 3. Is the stock/s are strategy increase her market exposure to 80%? II. Alternatives a. Purchase both of the stocks. b. Purchase stocks of California R.E.I.T only. c. Purchase stocks of Brown Group, Inc. only. Solution: 1. Calculate the Standard Deviation and Covariance of the Vanguard index, California R.E.I.T., & Brown Group, Inc. * Standard Deviation - In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility. In short, it measures the risk in each set of stocks. *Variance - Variance measures the variability (volatility) from an average. Volatility is a measure of risk, so this statistic can help determine the risk an investor might take on when purchasing a specific security. Based on the computation of standard deviation & Variance, California R.E.I.T., and Brown Group, Inc. had almost the same amount of risk. But California R.E.I.T. is much more risky than Brown Group, Inc. *Covariance - A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. Based on the computation of Covariance on the 2 proposed stocks, California R.E.I.T has the positive covariance and Brown Group, Inc., has the negative covariance. III. Course of Action Since California R.E.I.T., is more risky than Brown Group, Inc., based on the computed Standard Deviation, also California R.E.I.T., has a positive covariance which indicates

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