Beta Management Company Essay

854 words - 4 pages

October 1, 2012
Case Study#6: Beta Management Company
In 1988, Sarah Wolfe formed and became the CEO of an investment management company named Beta Management Company in the Boston metro area. It was primarily created due to the results of the October 1987 market crash when a rich married couple was saddened by their investment losses. In early 1991, Ms. Wolfe was pondering whether or not to initiate a plan to set out new objectives and guidelines for Beta in the upcoming year. Currently, Beta’s stated purpose was to enhance the returns and reduce risks for her high-net-worth clients through market timing. In order to accomplish this task, Ms. Wolfe would keep the vast majority of ...view middle of the document...

Wolfe’s investment strategy is definitely leaning in her direction for the future assuming if 1991 turns out to be a great year.
Before she can make any conclusions, Ms. Wolfe must consider the purchase of two stocks which would increase her market exposure heavily (around 80%). The two stocks are the California R.E.I.T. (Real Estate Investment Trust), which made equity and mortgage investments and Brown Group, Inc. which was a large manufacturer and retailer of shoes. First, she must calculate the variability of each stock. Variability is expressed through standard deviation. California R.E.I.T. produced an average return of -2.26% and had a standard deviation of 9.23%. Brown Group produced an average return of -0.67% and a standard deviation of 8.17%. Compared to the Vanguard fund, these are not good results for either individual stock. If Ms. Wolfe based her analysis solely off this information, she would rather prefer the Vanguard fund.
However, let us say that Beta’s position had been in 99% in the Vanguard and 1% of the individual stock, whether or not it was the California R.E.I.T. or Brown. If Beta had used the California R.E.I.T., the portfolio would have produced an average return of 1.09% and a standard deviation of 4.56% over the past two years. The Brown Group would have produced an average return of 1.08% and a standard deviation of 4.62%. On the contrary if Beta had...

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