Case Study 3
docx
School
University of Utah *
*We aren’t endorsed by this school
Course
4740
Subject
Finance
Date
Apr 3, 2024
Type
docx
Pages
4
Uploaded by BailiffBook94760
Beta Management Market timing is the strategy of attempting to predict the future movements of financial markets in order to buy and sell assets at the most advantageous times for maximum profit.
Ms. Wolfe has used the market timing strategy before in 1990, she opted to invest in the Vanguard Index 500 and employed market timing to transfer funds between money market accounts that have a beta close to 0; she allocated 100% of assets to the Vanguard fund during favorable market conditions in October-December and shifted 50% into money market accounts when anticipating a market downturn June-September. However, Ms. Wolfe strategy worked once doesn’t mean it will always work, predicting the market is a very hard task to do. In addition, exposing her client’s money to a risk like this while she’s trying to expand her work and
clients is not the best choice. Variability
is an important measure of
investment risk because it significantly impacts the
short-term performance of an investment. We’ll
calculate the variability using the standard
deviation. That assesses both systematic and
idiosyncratic risks associated with security, providing a useful measure for evaluating the risk of a single investment.
Covariance is also a good tool to use for assessing different opportunities. investments perform in relation to one another. A positive covariance indicates that two assets tend to perform well at the same time, while a negative covariance indicates that they tend to move in opposite direction.
If Ms. Wolfe were to invest 99% of her equity in Vanguard index fund and 1% in either stock California REIT, Brown Group. We’ll calculate the the standard deviation of each stock with 99% in Vanguard and 1% in each. The California REIT tends to be a lower risk than the Brown Group when invested 99% in Vanguard and 1% in California REIT. This is because of the Covariance we calculated above; investments perform in relation to one another. During the decline of Vanguard, we observed that
the California REIT will have an increase that is why the covariance is very low compared to Brown 23.66 and 3 for California REIT.
One of the best measures is beta
is a measure of a stock's sensitivity to movements in the overall market. It indicates how much a stock's price is likely to change in relation to a change in the market index. Now we’ll measure the stocks beta by performing a regression
model in Excel
using data analysis.
California REIT:
Brown Group: The beta of the California REIT is 0.15 and Brown Group is 1.16. This makes sense because the California REIT tends to move in the opposite direction of what we are compared to which is the
index fund. The covariance also proves this point of what we discussed above.
Lastly is the Risk/Return tradeoff which means that the higher risk is the higher return. But obviously this is not always the case, but this is what investors expects when investing in stocks or any investment. We’ll use the Capital Asset Pricing Model to calculate the expected return for both stocks. However, first we need the risk-free rate in 1990 is 8.55% and the risk premium is -7.45% because we are in a recession during that time. Formula:
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Expected return for California REIT: (CAPM)
Formula:
Expected return for Brown Group: (CAPM)
In Conclusion, If Ms. Wolfe had to pick a stock to invest in, I would recommend the California REIT, that is because it has a low covariance, and it is really good to have a diversified portfolio. Brown Group tends to be risky and doesn’t have any return in comparison with risk. Even though the California REIT had a higher standard deviation after completing all the analysis, California would be a better option. It is also worth mentioning that the California REIT had a much lower beta than the Brown Group.
Related Documents
Related Questions
(Computing the standard deviation for an individual investment) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes:
LOADING...
.
a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?
b. Calculate the standard deviation in the anticipated returns found in part
a.
c. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion.
State of Economy
Probability
Fund Returns
Rapid expansion and recovery…
arrow_forward
Fund F has been investing in stocks and bonds. You are evaluating the
performance of Fund F by comparing its performance with the performance of an
appropriate benchmark portfolio B. The performance and weights of F and B over
the last year are given in the table below:
Asset Class
Weight in F
Weight in B
0.6
Stocks
0.5
Bonds
0.5
Attribute the performance of Fund F against benchmark portfolio B in the stock
class. What is the attribution due to the asset allocation in the stock class? What
is the attribution due to the security selection in the stock class?
0.4
Return from F
O a. -0.005, -0.008
O b. 0.003; 0.004
O c. 0.012, 0.008
O d. 0.008; 0.012
10%
Return from B
3%
8%
5%
arrow_forward
The fund created by JPM to exploit overconfidence, loss aversion and momentum biases is described on their website:
The ticker symbol for the fund is JIVAX. It was launched in 2005.
Question: What has been the return to the fund from Jan 31, 2005 to the current date? Please provide the starting price, ending price and return over the time period.
arrow_forward
Help me please
arrow_forward
Please show work, don't use EXCEL
arrow_forward
Portfolio rebalancing is the process of bringing your different asset classes (stocks, bonds, and cash) back into proper relationship following a significant change in the value of one or more of them. You should monitor your investments and normally rebalance your portfolio about once a year to return your investments to their proper balance when they no longer conform to your investment plan.
Suppose that you begin an investment program with a portfolio having an asset allocation of 30% bonds, 60% equities, and 10% cash investments.
One year later, you find that some investments have performed better than others. After a year, the portfolio now consists of 40% bonds, 40% equities, and 20% cash investments.
To rebalance this portfolio back to its original asset allocation, you should sell some of your and use the proceeds to purchase additional .
arrow_forward
If a sophisticated investor consistently rebalances their portfolio every year among 14 different open-ended sector funds within four assets classes, which provider would be the most value-added?
A : Local commercial bank
B : Boutique money manager
C : A large family of funds
D : Financial supermarket
arrow_forward
You are given the following information for two funds A and B, relating to their performance
over the last five years.
A
B
Market
Risk-free Investment
Cumulative Total
Return
Covariance of
Standard deviation
Return
over 5 Years
of Return
with Market
76.20%
0.22
0.044
101.10%
0.32
0.075
92.50%
0.25
40.30%
Calculate the Treynor, Sharpe and Jensen performance measures for Funds A and B. What do
they tell you about the performance of the funds?
arrow_forward
As the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8, while Mr. B has a risk-tolerance factor of 27. The characteristics for four model portfolios follow:
ASSET MIX
Bond
93%
75
32
13
Portfolio
1
2
3
4
Stock
7%
25
GB
87
a. Calculate the expected utility of each prospective portfolio for each of the two clients. Do not round intermediate calculations. Round your answers to two decimal places.
1
2
3
Portfolio
Ms. A
ER
8%
9
10
11
b. Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B?
Portfollo-Select-represents the optimal strategic allocation for Ms. A. Portfolio Select is the optimal allocation for Mr. B.
c. For Ms. A, what level of risk tolerance would leave her indifferent between having Portfolio 1 or Portfolio 2 as her strategic…
arrow_forward
In a recent 5tear period, mutual fund manager Diana sharks produced the following percentage rates of return for the Mesozoic fund. Rates of return on the market index are given for comparison.
A. Calculate the average return on both the fund and the index and the standard deviation of the returns on each. Did Ms. Sauros do better or worse than the market index on these measures?
arrow_forward
An individual with only $10,000 to invest is most likely better off investing in
Select one:
A.
ETFs to increase the diversification.
B.
individual equities to increase portfolio efficiency.
C
C.
individual bonds and individual equities to increase efficiency.
D.
mutual funds to increase the expected return.
What is the correlation coefficient for two assets with a covariance of .0032, if asset 1 has a
standard deviation of 12 per cent and asset 2 has a standard deviation of 9 per cent?
Select one:
C
A.
0.3456
C
B.
1.5980
C.
0.8721
D.
0.2963
arrow_forward
Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments: X, Y, and Z. Assume that the measure of risk Sharon cares about is an asset's standard deviation. The expected returns and standard deviations of the investments are as follows:
Investment
Expected
return
Standard
deviation
X
17%
7%
Y
17%
8%
Z
17%
9%
a. If Sharon were risk neutral, which investment would she select? Explain why.
b. If she were risk averse, which investment would she select? Why?
c. If she were risk seeking, which investments would she select? Why?
d. Suppose a fourth investment, W, is available. It offers an expected return of 18%,and it has a standard deviation of 9%. If Sharon is risk averse, can you say which investment she will choose? Why or why not? Are there any investments that you are certain she will not choose?
arrow_forward
(Expected rate of return) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes:
LOADING...
.
a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?
b. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion.
State of Economy
Probability
Fund Returns
Rapid expansion and recovery
15%
100%
Modest growth
35%
30%
Continued recession
35%
10%
Falls into depression
15%
−100%
arrow_forward
What risks are inherent in using the expected future cash flow method of evaluating projects?
In what circumstances would you choose to use a dividend discount model rather than a free cash flow model to value a firm?
arrow_forward
Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items.
Question 2Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph
arrow_forward
(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is
2.5
percent and the expected return for the market is
9
percent.
Stock
Beta
K
1.06
G
1.28
B
0.78
U
0.93
(Click
on the icon
in order to copy its contents into a
spreadsheet.)
a. Using the CAPM, what rates of return should Grace require for each individual security?
b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to
4
percent and the market risk premium were to be only
6
percent?
c. Which market risk premium scenario (from part a or
b)
best fits a recessionary environment? A period of economic expansion? Explain your response.
Question content area bottom
Part 1
a. The expected rate of return for security K, which has a beta of
1.06,
is
enter your response here%.
(Round to two decimal places.)
Part 2
The expected rate…
arrow_forward
You are an employee at XYZ Bank. Your Bank is trying the construct an investment portfolio that matches its resources and goals. To do so, you and your team are
required to evaluate the investment options available for your Bank and decide what is the best option to choose.
A
B
C
D
E
Value of the
1,400,500 1,370,050 750,000 450,300 1,700,650
position
Duration
5
4
6
YTM
4%
3%
7%
8%
5.50%
Potential
adverse move
0.30%
0.26%
0.43%
0.56%
0.37%
in yield
Correlation
A.
В
D
E
A
1.
0.5
0.3
0.1
-0.2
B
1
0.2
-0.3
0.4
1
0.2
-0.3
D
1.
-0.4
E
Weight
А
В
D
E
Scenario I
30.00%
10.00%
60.00%
Scenario II
50.00%
30.00%
20.00%
Scenario III
50.00%
50.00%
arrow_forward
Kelli Blakely is a portfolio manager for the Miranda Fund, a core large-cap equity fund. The benchmark for performance measurement
purposes is the S&P 500. Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is
allowed a significant amount of leeway in managing the fund.
Blakely was able to produce exceptional returns last year (as outlined in the table below) through her market timing and security
selection skills. At the outset of the year, she became extremely concerned that the combination of a weak economy and geopolitical
uncertainties would negatively impact the market. Taking a bold step, she changed her market allocation. For the entire year her asset
class exposures averaged 50% in stocks and 50% in cash. The S&P's allocation between stocks and cash during the period was a
constant 97% and 3%, respectively. The risk-free rate of return was 2%.
One-Year Trailing Returns
Miranda
Fund
10.2%
37%
Return
Standard deviation…
arrow_forward
Kelli Blakely is a portfolio manager for the Miranda Fund, a core large-cap equity fund. The benchmark for performance
measurement purposes is the S&P 500. Although the Miranda portfolio generally mirrors the asset class and sector
weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund.
Blakely was able to produce exceptional returns last year (as outlined in the table below) through her market timing and
security selection skills. At the outset of the year, she became extremely concerned that the combination of a weak
economy and geopolitical uncertainties would negatively impact the market. Taking a bold step, she changed her market
allocation. For the entire year her asset class exposures averaged 50% in stocks and 50% in cash. The S&P's allocation
between stocks and cash during the period was a constant 97% and 3%, respectively. The risk-free rate of return was 2%.
One-Year Trailing Returns
Miranda
Fund
10.2%
37%
Return
Standard deviation
Beta…
arrow_forward
(Related to Checkpoint 8.1) (Expected rate of return) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at
what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following
possible outcomes:
a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?
b. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid
expansion.
a. The expected rate of return from this investment opportunity is %. (Round to two decimal places)
Data Table
State of Economy
Rapid expansion and recovery
Modest growth
Continued recession
Falls into…
arrow_forward
Travellers Inn (Millions of Dollars)
Cash
$ 10
Accounts payable
$ 10
Accounts
20
Accruals
15
receivable
Inventories
20
Short-term debt
Current assets
$ 50
Current liabilities
$ 25
Net fixed assets
50
Long-term debt
30
Preferred stock (50,000 shares)
5
Common equity
Common stock (3,800,000 shares)
$ 10
Retained earnings
30
Total common equity
$ 40
Total assets
$100
Total liabilities and equity
$100
The following facts also apply to TII:
1. The long-term debt consists of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon
rate of 7.8%, and a face value of $1,000. Currently, these bonds provide investors with a yield to maturity of
11.8%. If new bonds were sold, they would have an 11.8% yield to maturity.
2. TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $2, and has a yield
to investors of 8%. New perpetual preferred stock would have to provide the same yield to investors, and the
company would incur a 3.55% flotation…
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you

Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Related Questions
- (Computing the standard deviation for an individual investment) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes: LOADING... . a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity? b. Calculate the standard deviation in the anticipated returns found in part a. c. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion. State of Economy Probability Fund Returns Rapid expansion and recovery…arrow_forwardFund F has been investing in stocks and bonds. You are evaluating the performance of Fund F by comparing its performance with the performance of an appropriate benchmark portfolio B. The performance and weights of F and B over the last year are given in the table below: Asset Class Weight in F Weight in B 0.6 Stocks 0.5 Bonds 0.5 Attribute the performance of Fund F against benchmark portfolio B in the stock class. What is the attribution due to the asset allocation in the stock class? What is the attribution due to the security selection in the stock class? 0.4 Return from F O a. -0.005, -0.008 O b. 0.003; 0.004 O c. 0.012, 0.008 O d. 0.008; 0.012 10% Return from B 3% 8% 5%arrow_forwardThe fund created by JPM to exploit overconfidence, loss aversion and momentum biases is described on their website: The ticker symbol for the fund is JIVAX. It was launched in 2005. Question: What has been the return to the fund from Jan 31, 2005 to the current date? Please provide the starting price, ending price and return over the time period.arrow_forward
- Help me pleasearrow_forwardPlease show work, don't use EXCELarrow_forwardPortfolio rebalancing is the process of bringing your different asset classes (stocks, bonds, and cash) back into proper relationship following a significant change in the value of one or more of them. You should monitor your investments and normally rebalance your portfolio about once a year to return your investments to their proper balance when they no longer conform to your investment plan. Suppose that you begin an investment program with a portfolio having an asset allocation of 30% bonds, 60% equities, and 10% cash investments. One year later, you find that some investments have performed better than others. After a year, the portfolio now consists of 40% bonds, 40% equities, and 20% cash investments. To rebalance this portfolio back to its original asset allocation, you should sell some of your and use the proceeds to purchase additional .arrow_forward
- If a sophisticated investor consistently rebalances their portfolio every year among 14 different open-ended sector funds within four assets classes, which provider would be the most value-added? A : Local commercial bank B : Boutique money manager C : A large family of funds D : Financial supermarketarrow_forwardYou are given the following information for two funds A and B, relating to their performance over the last five years. A B Market Risk-free Investment Cumulative Total Return Covariance of Standard deviation Return over 5 Years of Return with Market 76.20% 0.22 0.044 101.10% 0.32 0.075 92.50% 0.25 40.30% Calculate the Treynor, Sharpe and Jensen performance measures for Funds A and B. What do they tell you about the performance of the funds?arrow_forwardAs the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8, while Mr. B has a risk-tolerance factor of 27. The characteristics for four model portfolios follow: ASSET MIX Bond 93% 75 32 13 Portfolio 1 2 3 4 Stock 7% 25 GB 87 a. Calculate the expected utility of each prospective portfolio for each of the two clients. Do not round intermediate calculations. Round your answers to two decimal places. 1 2 3 Portfolio Ms. A ER 8% 9 10 11 b. Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B? Portfollo-Select-represents the optimal strategic allocation for Ms. A. Portfolio Select is the optimal allocation for Mr. B. c. For Ms. A, what level of risk tolerance would leave her indifferent between having Portfolio 1 or Portfolio 2 as her strategic…arrow_forward
- In a recent 5tear period, mutual fund manager Diana sharks produced the following percentage rates of return for the Mesozoic fund. Rates of return on the market index are given for comparison. A. Calculate the average return on both the fund and the index and the standard deviation of the returns on each. Did Ms. Sauros do better or worse than the market index on these measures?arrow_forwardAn individual with only $10,000 to invest is most likely better off investing in Select one: A. ETFs to increase the diversification. B. individual equities to increase portfolio efficiency. C C. individual bonds and individual equities to increase efficiency. D. mutual funds to increase the expected return. What is the correlation coefficient for two assets with a covariance of .0032, if asset 1 has a standard deviation of 12 per cent and asset 2 has a standard deviation of 9 per cent? Select one: C A. 0.3456 C B. 1.5980 C. 0.8721 D. 0.2963arrow_forwardSharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments: X, Y, and Z. Assume that the measure of risk Sharon cares about is an asset's standard deviation. The expected returns and standard deviations of the investments are as follows: Investment Expected return Standard deviation X 17% 7% Y 17% 8% Z 17% 9% a. If Sharon were risk neutral, which investment would she select? Explain why. b. If she were risk averse, which investment would she select? Why? c. If she were risk seeking, which investments would she select? Why? d. Suppose a fourth investment, W, is available. It offers an expected return of 18%,and it has a standard deviation of 9%. If Sharon is risk averse, can you say which investment she will choose? Why or why not? Are there any investments that you are certain she will not choose?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning

Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning