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Case, Beta Management

Case, Beta Management - added(lower correlation • Run...

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Case: Beta Management Nikkei rebounds today? o Investors think it was very undervalued after huge drop, buy more o Also, Bank of Japan pumped a lot of $ into economy Falling value of Japan’s yen: o Helps stock market b/c Japanese goods become more affordable Issue: o Ms. Wolfe (CEO of Beta) has most of $ in Vanguard index o Should she move some to small stocks? Cal REIT Brown Group Goal: o Enhance returns but reduce risk through market timing o We are trying to manipulate market timing right now, but we want to actively select stocks as well Cal REIT has higher individual SD, but has less of an effect on the portfolio SD when
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Unformatted text preview: added (lower correlation) • Run regression: o Slop coefficient given is Beta o Index/ portfolio should always be on x-axis o Individual stock should be on y-axis • Since the beta for Brown is higher, it is riskier than Cal o Since beta for index would be 1, in order to invest in Brown its required return would be higher o In efficient market, for one extra unit of risk how much extra return would you need? o CAPM gives required rate of return o Market risk premium typically between 4% and 7% o Do we think Cal will provide us w/ required rate? That’s how we decide whether to invest in Cal...
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