Page 189 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes and she like the steady cash flow and earnings. She noted, though, that Brown’s stock price
seemed quite variable and somewhat sensitive to movements in the stock market. Still,
she felt it was an attractive opportunity at its January 4 price of $24.
Ms. Wolfe felt that now was the right time to begin her program of adding individual
stock investments 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 worried about the variability in individual stocks in general, and these
stocks in particular. After all, she had always promised her clients reasonable returns with
a focus on keeping their exposure to risk under control. She noticed that these stocks both
seemed to bounce around in price much more than the market (or the index fund), and she
wondered if she was doing the right thing exposing her clients to these new risks.

Table 1: Investment Return Data

Month Vanguard Index 500 Trust California R.E.I.T. Brown Group
1989 – January 7.32 -28.26 9.16
February -2.47 -3.03 0.73
March 2.26 8.75 -0.29
April 5.18 -1.47 2.21
May 4.04 -1.49 -1.08
June -0.59 -9.09 -0.65

July 9.01 10.67 2.22
August 1.86 -9.38 0
September -0.4 10.34 1.88

October -2.34 -14.38 -7.55
November 2.04 -14.81 -12.84
December 2.38 -4.35 -1.7
1990 – January -6.72 -5.45 -15.21
February 1.27 5 7.61
March 2.61 9.52 1.11
April -2.5 -0.87 -0.51
May 9.69 0 12.71
June -0.69 4.55 3.32
July -0.32 3.48 3.17
August -9.03 0 -14.72

September -4.89 -13.04 -1.91
October -0.41 0 -12.5
November 6.44 1.5 17.26
December 2.72 -2.56 -8.53

Questions
1. Compute the standard deviation of the stock returns of California REIT and Brown
Group during the past 2 years.
Contd...

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