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Beta ManagementBeta Management

CompanyCompanyIPMI Financial Management

Regular January 2011

Group III

David, Osvald, Ronald, Tjahjo

5-Apr-2012

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AgendaAgenda

Companys Background

Available Investment Options

Decision Approach

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BackgroundBackground

Sarah Wolfe is founder and CEO of BetaManagement Group, focuses on smallerstocks, especially index. low-expense,

neutral return Growth has allowed her to move into

picking stocks

Considering good value and good year in1991

Decision to be made on two small andhighly variable listed stocks (California

REIT and/or Brown Group), but is

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Beta Financial PortfolioBeta Financial Portfolio

Sarah Wolfe would keep majority of Betasfunds in non-load, low-expense index fundunder Vanguards Index 500 Trust

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Case AnalysisCase Analysis

Ms. Wolfe felt that now was the right time to beginher program of adding individual stockinvestments and increasing her equity position. A$200,000 purchase of one of these stocks would

increase her total equity exposure to $20 million.Still, she had some doubts. She was quite worriedabout he variability in individual stocks in general,and these stocks in particular. After all, she hadalways promised her clients reasonable returns

with a focus on keeping their exposure to riskunder control. She noticed that these stocks bothseemed to bounce around in price much morethan the market (or the index fund), and shewondered if she was doing the right thing exposing

her clients to these new risks.

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Available InvestmentAvailable Investment

AlternativesAlternatives Index Fund

Low return with manageable risk

Stock Market Potential to get high return with morerisks (riskier than the index fund)

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Investment in IndexInvestment in Index

FundFund An index fund or index tracker is a collective

investment scheme (usually a mutual fund orexchange-traded fund) that aims to replicate themovements of an index of a specific financialmarket, or a set of rules of ownership that are held

constant, regardless of market conditions Traditional indexing. Indexing is traditionally known

as the practice of owning a representative collection ofsecurities, in the same ratios as the target index

Synthetic indexing. Synthetic indexing is a moderntechnique of using a combination of equity index futures

contracts and investments in low risk bonds to replicatethe performance of a similar overall investment in theequities making up the index

Enhanced indexing. Enhanced indexing is a catch-allterm referring to improvements to index fundmanagement that emphasize performance, possibly

using active management

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Analysis ToolsAnalysis Tools

Utilizing forecasting methodologiesand apply sensitivities analysis from:

Averaging and Standard Deviation

Forecasting Regression Analysis

Sensitivities between the Priorities

Capital Asset Pricing Model

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Monthly Return DataMonthly Return Data

Ms. Wolfe has the information of actual percentage ofmonthly returns from the Vanguard index and individualstocks (CAL-REIT and Brown)

This will be one of the only information she has to help her

with the decision analysis process

Vanguard Cal REIT Brown Vanguard Cal REIT Brown

Jan-89 7.32 -28.26 9.16 Jan-90 -6.72 -5.45 -15.21

Feb-89 -2.47 -3.03 0.73 Feb-90 1.27 5.00 7.61

Mar-89 2.26 8.75 -0.29 Mar-90 2.61 9.52 1.11

Apr-89 5.18 -1.47 2.21 Apr-90 -2.50 -0.87 -0.51

May-89 4.04 -1.49 -1.08 May-90 9.69 0.00 12.71Jun-89 -0.59 -9.09 -0.65 Jun-90 -0.69 4.55 3.32

Jul-89 9.01 10.67 2.22 Jul-90 -0.32 3.48 3.17

Aug-89 1.86 -9.38 0.00 Aug-90 -9.03 0.00 -14.72

Sep-89 -0.40 10.34 1.88 Sep-90 -4.89 -13.04 -1.91

Oct-89 -2.34 -14.38 -7.55 Oct-90 -0.41 0.00 -12.50

Nov-89 2.04 -14.81 -12.84 Nov-90 6.44 1.50 17.26

Dec-89 2.38 -4.35 -1.70 Dec-90 2.72 -2.56 -8.53

PeriodMonthly returns (%)

PeriodMonthly returns (%)

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Average and StandardAverage and Standard

DeviationDeviation

In general, Vanguard Index 500 have higher averagemonthly return than CAL-REIT and Brown. The individual

stocks have almost double the variability of the VanguardIndex 500. The individual stocks are riskier

CAL-REIT had greater volatility of return, in other wordCalifornia REIT seems riskier than Brown Group based onStandard Deviation

Type Average StandardDeviation

Vanguard 1.10 9.23

California REIT -2.27 4.61

Brown -0.67 8.17

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Correlation: Vanguard vs.Correlation: Vanguard vs.

CAL-REITCAL-REIT

-30

-25

-20

-15

-10

-5

0

5

10

15

Ja

n-

89

Fe

b-

89

Ma

r-

89

Ap

r-

89

Ma

y-

89

Ju

n-

89

J

ul-

89

Au

g-

89

Se

p-

89

Oc

t-

89

No

v-

89

De

c-

89

Ja

n-

90

Fe

b-

90

Ma

r-

90

Ap

r-

90

Ma

y-

90

Ju

n-

90

J

ul-

90

Au

g-

90

Se

p-

90

Oc

t-

90

No

v-

90

De

c-

90

Vanguard- Index 500 Trust California REIT

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Correlation: VanguardCorrelation: Vanguard

vs. Brownvs. Brown

-20

-15

-10

-5

0

5

10

15

20

Ja

n-

89

Fe

b-

89

Ma

r-

89

Ap

r-

89

Ma

y-

89

Ju

n-

89

J

ul-

89

Au

g-

89

Se

p-

89

Oc

t-

89

No

v-

89

De

c-

89

Ja

n-

90

Fe

b-

90

Ma

r-

90

Ap

r-

90

Ma

y-

90

Ju

n-

90

J

ul-

90

Au

g-

90

Se

p-

90

Oc

t-

90

No

v-

90

De

c-

90

Vanguard- Index 500 Trust Brown Group

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Historical Trends ofHistorical Trends of

Existing FinancingExisting Financing

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

J an-89

Feb-89

M ar-89

Apr-89

M ay-89

J un-89

J ul-89

Aug-89

Sep-89

Oct-89

Nov-89

Dec-89

J an-90

Feb-90

M ar-90

A pr-90

M ay-90

J un-90

J ul-90

Aug-90

Sep-90

Oct-90

Nov-90

Dec-90

Vanguard Cal REIT Brown

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CAL-REIT Trend LinesCAL-REIT Trend Lines

-35.00

-30.00

-25.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

J an-

89

Feb-

89

M ar-

89

Apr-

89

M ay-

89

J un-

89

J ul-

89

Aug-

89

Sep-

89

Oct-

89

Nov-

89

Dec-

89

J an-

90

Feb-

90

M ar-

90

A pr-

90

M ay-

90

J un-

90

J ul-

90

Aug-

90

Sep-

90

Oct-

90

Nov-

90

Dec-

90

Cal REIT Linear (Cal REIT)

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Brown Group Trend LinesBrown Group Trend Lines

Chart Title

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

J an-

89

Feb-

89

M ar-

89

Apr-

89

M ay-

89

J un-

89

J ul-

89

Aug-

89

Sep-

89

Oct-

89

Nov-

89

Dec-

89

J an-

90

Feb-

90

M ar-

90

A pr-

90

M ay-

90

J un-

90

J ul-

90

Aug-

90

Sep-

90

Oct-

90

Nov-

90

Dec-

90

Brown Linear (Brown)

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Capital Asset PricingCapital Asset Pricing

ModelModel Equation: KE = RF + bs (KM RF)

Assume Risk free rate (RF) is 8% per year

Assume Effective Return Rate

California REIT = -27.19%

Brown Group = -8.05%

Vanguard 500 Index = 13.23%

13.23% assumed will be expected returnrate

California REIT = 8% + 0.15 (13.23% - 8%)= 8.79%

Brown Group = 8% + 1.16 (13.23% - 8%)

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SummarySummary

Brown Group Higher Risk

Higher Return

California

Lower Risk Lower Return

Buy Brown Grouprather than CAL-REITor if need to buy

both, thecomposition will be: CAL-REIT 40%

Brown Group 60%

CaliforniaREIT

BrownGroup

AVERAGE

-1.44 -1.20

Standard

Deviation

7.11 9.10

CAPM 8.79% 14.07%