This document discusses a case study on beta management. It provides objectives of gaining skills in calculating risk/return measures, understanding concepts like total risk and diversifiable/undiversifiable risk. It examines investment strategies for a portfolio containing a Vanguard S&P 500 index fund with potential additions of individual stocks like California REIT and Brown Group. It analyzes the risks, expected returns and economic impact of these choices using metrics like standard deviation, beta and changes to dollar volatility. The conclusion is that the Brown stock increases portfolio risk more than the REIT due to its higher covariance with the market.
We are a Quantitative investment group committed to revolutionize the fund management industry in the country. We are using pure quant technique to create a zero loss fund (the fund will always be positive) i.e; all of your losses (if any) will be insured.
Dimensional Fund Advisors' powerful slides on the small cap and value effect detail how small stocks and value stocks enhance portfolio returns and explain portfolio performance.
Structured Investing In An Unstructured WorldRobert Davis
Structured Investing is based on 80+ years of financial market data, Nobel Prize-winning economic research, and in-depth studies of investor psychology and behavior.
We are a Quantitative investment group committed to revolutionize the fund management industry in the country. We are using pure quant technique to create a zero loss fund (the fund will always be positive) i.e; all of your losses (if any) will be insured.
Dimensional Fund Advisors' powerful slides on the small cap and value effect detail how small stocks and value stocks enhance portfolio returns and explain portfolio performance.
Structured Investing In An Unstructured WorldRobert Davis
Structured Investing is based on 80+ years of financial market data, Nobel Prize-winning economic research, and in-depth studies of investor psychology and behavior.
In this presentation, we review methods and best practices for the portfolio construction and evaluation process. The presentation covers risk and return estimation, mean-variance optimization as well as techniques for analyzing exposure to loss and wealth potential.
On Thursday, April 27th, 2017, we heard from Windham's own client consultant, Jon Kazarian about best methods and practices for the portfolio construction and evaluation process.
In this presentation, we review methods and best practices for the portfolio construction and evaluation process. The presentation covers risk and return estimation, mean-variance optimization as well as techniques for analyzing exposure to loss and wealth potential.
On Thursday, April 27th, 2017, we heard from Windham's own client consultant, Jon Kazarian about best methods and practices for the portfolio construction and evaluation process.
Question 1Risk & Return and the CAPM. Based on the following.docxIRESH3
Question 1
Risk & Return and the CAPM.
Based on the following information, calculate the required return based on the CAPM:
Risk Free Rate = 3.5%
Market Return =10%
Beta = 1.08
Question 2
Risk and Return, Coefficient of Variation
Based on the following information, calculate the coefficient of variation and select the best investment based on the risk/reward relationship.
Std Dev.Exp. Return
Company A 7.4 13.2
Company B 11.6 18.9
Question 3
Risk and Return, Coefficient of Variation
Based on the following information, calculate the coefficient of variation and select the best investment based on the risk/reward relationship.
Std Dev.Exp. Return
Company A 10.4 15.2
· Company B 14.6 22.9
Question 4
Measures of Risk.
Address each source of risk that is measured and relate it to two models addressed in this unit.
· Your response should be at least 250 words in length.
BBA 3301, Financial Management 1
UNIT VI STUDY GUIDE
Risk and Return
Learning Objectives
Upon completion of this unit, students should be able to:
1. Explain the risk-reward relationship.
2. Calculate holding period returns.
3. Calculate required returns using the Capital Asset Pricing Model
(CAPM).
4. Calculate the coefficient of variation for varying investments.
5. Decompose sources of risk.
6. Contrast measures of risk.
7. Describe portfolio theory and diversification.
Written Lecture
Whenever a business or individual makes an investment decision, risk must be
considered. This unit focuses entirely on the risk-return relationship, providing
tools for measurement, analysis and decision making.
To begin, the term risk must be defined. From a practical or applied perspective,
risk is the probability of losing some or all of the money invested. In finance, risk
is often associated with volatility of variance in returns (around some average
return). Generally, it is assumed that investments that offer higher returns
involve greater risk. For purposes of this unit, risk is measured through two
primary measures:
Standard Deviation, and
The Beta Coefficient
The rate of return allows an investment's return to be compared with other
investments. For one-year investments, the return on a debt investment is:
k = interest paid / loan amount
The return on a stock investment is calculated by the following equation
k = [D1 + (P1 – P0)] / P0
Where:
D1 = Dividends for the “next” year (on a share of stock)
P1= Price of a share of stock, one period into the future
P0= Price of a share of stock today
The expected return on stock is the return investors feel is most likely to occur
based on current information. Return is influenced by the combination of stock
price (capita ...
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Send your semester & Specialization name to our mail id :
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or
call us at : 08263069601
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Sandpiper Capital is a RIA firm. Our mission is to deliver effective portfolio management at low cost to institutions and individuals who have made risk control a priority.
We are constantly weighing the value of the markets. We aspire to use the miscalculations that inevitably arise from decisions that are generated in environments of fear and greed to sell to the over-reaching and to buy from the fearful. Cost efficiency, risk avoidance and proven, logic-based strategies are the benchmarks of a successful investment program.
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A paper by Thomas J. Linsmeier and Neil D. Pearson. This paper is a self-contained introduction to the concept and methodology of “value at risk”. It explains the concept of
value at risk, and then describes in detail the three methods for computing it: historical simulation;
the variance-covariance method; and Monte Carlo or stochastic simulation. It also discusses the
advantages and disadvantages of the three methods for computing value at risk.
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Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
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2. The Objectives
1. To gain practice in calculating risk
and return measures on stocks and
portfolios, including estimation of beta
for stocks by simple regressions.
2. To understand concepts of total risk,
portfolio risk, diversifiable and
undiversifiable risk, and how these
relate to the beta.
3. To gain an appreciation of the
relation between risk and return, and
the CAPM.
4. To allow an introductory discussion of
investment strategies.
3. The Issues
1. The Strategy
2. The Choices
3. The Risks
4. The Port Folio Risks
5. The Return
4. The Strategy
Ms.Wolfe Keeps majority of funds in no
load, low-expense index funds. She
preferably use vanguard’s Index 500
Trust due to its extremely low expense
ratio and its success at closely matching
the return of the S&P 500 index.
She make money for its client by
investing in index fund even in down
market year.
Company loses potential new clients
because She only use index mutual fund
and use none of its own stocks.
5. Company decided to purchase individual
stock to make the equity portfolio.
Focus on smaller stocks are made to
invest.
She focus on two stocks :California REIT
and Brown group.
Both stocks are NYSE listed and stock
price are bad over past two year.
Both stocks are volatile stocks.
The Choices
6. Some Information of REITS
(REIT, WWW.reit.com)
REIT: Real Estate Investment Trust.
A REIT invests in income-producing property,
and may also invest in loans on property.
There are about 300 REITs, with about 2/3
traded on an exchange, and with assets over
$300 B.
Cumulative returns from 1/1/99 to 3/3/2003:
◦ REIT=40.67%, S&P500 = -32.09%.
Volatility over 1/1/99 to 3/3/2003.
◦ REIT = 11.71%, S&P = 22.16%.
Correlation between returns over 1/1/99 to
3/3/200: 0.2843.
REIT Index beta from daily data = 0.15.
7. Some Information of Brown Shoe
WWW.Brownshoe.com
Brown Shoe Company is a $2.6 billion,
global footwear company whose shoes are
worn by people of all ages, from all walks
of life.
9. The Risks
The total risk: The standard deviation of
each stocks.
Vanguard =15.96%
REIT = 32%
Brown=28.30%
The individual stocks have almost
double the variability of the Vanguard
Index 500.
So the individual stocks are riskier.
REIT is more riskier than Brown based
on Standard Deviation.
10. Portfolio risk
The portfolio : 99% Vanguard + 1%
Stock.
St.dev of Portfolio(99%
vangauard,1%Brown)
Brown= 16%.
St.dev of
Portfolio(99%vangauard,1%REIT)
REIT= 15.83%
The Beta :
REIT=0.141
Brown=1.11
11. Portfolio risk
Comparing these portfolios, we see that
the Brown stock adds more variability to
the portfolio. Thus, Brown is riskier.
This answer differs from that in individual
stock because a large part of the
portfolio's risk is related to the
covariance between the individual stock
and Vanguard. Since the covariance
between Brown's stock and Vanguard is
almost 8 times that between REIT and
Vanguard, the portfolio that includes
Brown is riskier.
12. Economic Significance
Consider the dollar impact on existing portfolio
when the new asset is added.
Investment in vanguard =79.2% of $25 M
=0.792*25
=$19.8M
Current investment = $19.8 M in index fund of
volatility, with volatility of 15.96%. (Stdev
(vanguard)= 15.96%)
In terms of dollars, the volatility =
0.1596*19.8
= $3.16 M.
=$3,160,000
13. If additional $200 K is invested in Brown, the new dollar
volatility is 0.16x20=$3.2M,
Dollars at risk increase by $40,000 (3,200,000-3,160,000).
If additional $200 K is invested in the California REIT,
the new dollar volatility is 0.1582x20=$3.164M,
Dollars at risk increase by $4000(3,164,000-3,160,000).
If additional $200 K is invested in index itself,
the new dollar volatility is 0.1596x20=$3.192M,
Dollars at risk increase by $32,000.(3,192,000-3,160,000)
Approximate beta of Brown = 40,000/32000=1.25 (From
regression, beta = 1.11).
Approximate beta of California REIT =
4000/32,000=0.125(From regression, beta = 0.141).
14. The Expected Returns
Expected rate: (CAPM), on annual rate
basis
REIT=8%
Brown=14.87%
Lower the beta, stock will be less sensitive
to market movements. The higher beta
stock(Brown) is riskier.
CAPM of Brown group is high. The Brown
Group stock should have a higher expected
return. The riskiness of a stock should be
measured by its covariance with the
market, rather than its own variance.
15. The (Required) Returns
When adding a small amount of a new
asset to a diversified portfolio.
Covariance between the new asset and
the portfolio, matters more to the total
risk of the final portfolio.
Individual risks can be diversified away
in a portfolio. But the market risk has
to be held by investors.
17. Beta Value Calculations of the shares
The Beta value of a stock describes the
risk of a single stock with respect to
the risk of the overall market. Beta is
defined by the following equation
Where rs are the return on the stock and
rb is the return on a benchmark index.
18. Advantages of investing in Volatile
shares
Maximum return is obtained in volatile
shares in short period of time.
19. Indexed funds
An index fund or index tracker is
a collective investment fund (usually
a mutual fund or exchange traded
fund) that aims to replicate the
movements of an index of a specific
financial market, or a set of rules of
ownership that are held constant,
regardless of market conditions.
As of 2007, index funds made up over
11% of equity mutual fund assets in
the US.
20. Tracking can be achieved by trying to hold
all of the securities in the index, in the
same proportions as the index. Other
methods include statistically sampling the
market and holding "representative"
securities. Many index funds rely on a
computer model with little or no human
input in the decision as to which securities
are purchased or sold and are thus
subject to a form of passive management.