Beta Management Company is an introductory case on risk, diversification, investments, and the capital asset pricing model (CAPM). Please use the following questions to guide your analysis for this week's project:
1. Using the data in table 1, please calculate the variance and standard deviation and returns for each of the following three assets: the Brown Group, CALREIT, and the Vanguard S&P 500 Index fund. Indicate which asset appears to have more risk.
2. Compute the portfolio standard deviation and return for a portfolio consisting of Brown Group combined with the Vanguard S&P 500 Index fund (1% BROWN/99% VANGUARD allocation). Compute the portfolio standard deviation and return for a portfolio consisting of CALREIT combined with the Vanguard S&P 500 Index fund (1% CALREIT/99% VANGUARD allocation). Explain how each stock affects the variability of the total portfolio and explain how this relates to your answer to question one.
3. Present a chart with a trend line that illustrates the beta portfolios in question #2. Please include a brief explanation of your analysis. ( Note: The beta is simply the slope of the trend line. The equation for the trendline gives an indication of how the asset moves with the market portfolio.)
4. Explain how the expected return of each stock relates to its beta.
5. Indicate which option, if any, Ms. Wolfe should invest in and why.

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