DescriptionA manager of a small investment company has been successfully using indexfunds for limited market timing. Growth has allowed her to move into pickingstocks. She is considering two small and highly variable listed stocks, but isconcerned about the risk that these investments might add to her “portfolio.”Provides a lead-in to the CAPM. Students learn about total risk, non-diversifiableor portfolio risk, and (CAPM) beta, and calculate variability of the stocksseparately, and portfolio variance with and without the stocks, to see how anextremely risky (but low-beta) stock actually reduces risk; and calculate stockbetas.Assignment Questions1. Calculate the variability (standard deviation) of the stock returns ofCalifornia REIT and Brown Group during the past 2 years. How variableare they compared with Vanguard Index 500 Trust? Which stock appearsto be riskiest?2. Suppose Beta’s position had been 99% of equity funds invested in theindex fund, and 1% in the individual stock. Calculate the variability (bystandard deviation) of this portfolio using each stock. How does each stockaffect the variability of the equity investment, and which stock is riskiest?Explain how this makes sense in view of your answer to Question #1above.3. Perform a regression of each stock’s monthly returns on the Index returnsto compute the “beta” for each stock. How does this relate to the situationdescribed in Question #2 above?4. If Ms. Wolfe’s sole purpose is to minimize the portfolio risk, then whichstock is her choice?Caution•Vanguard index fund is the same as market portfolio.•When executing regression procedure do not the excess returns (rawreturn – riskfree rate) but use the raw returns due to the lack of risk-freereturn data.