Concepts on Beta, Valuation and

Diversification
 Objective: to understand the valuation of public
companies and the principles of diversification of equity
assets in order to translate these principles to private
company valuation and implications for the diversification
strategy of private company stockholders
The Problem with Betas
From Wikipedia:
 In finance, the Beta (β) of a stock or portfolio is a number describing the relation of its
returns with that of the financial market as a whole.[1]
 An asset has a Beta of zero if its returns change independently of changes in the market's
returns. A positive beta means that the asset's returns generally follow the market's returns, in
the sense that they both tend to be above their respective averages together, or both tend to be
below their respective averages together. A negative beta means that the asset's returns
generally move opposite the market's returns: one will tend to be above its average when the
other is below its average.[2]
 The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It
measures the part of the asset's statistical variance that cannot be removed by the
diversification provided by the portfolio of many risky assets, because of the correlation of its
returns with the returns of the other assets that are in the portfolio. Beta can be estimated for
individual companies using regression analysis against a stock market index.
 Diversified investors can diversify away Non Systemic Risk but have to handle Systemic
Risk

 Expected Re= Rf + *(Rm-Rf)

To analyze financial asset behavior we constructed a portfolio of
thirty mutual funds’ monthly performance from 12/2006-
11/2010 – net of the Rf for that month
Monthly Standard
return net of Deviation of
SIM ASSET Rf returns Sdev/Mean Beta
TIPs Inflation-protected Treasuries 0.15% 2% 1651% 0.14
AGG US Bonds 0.21% 1% 719% 0.05
OIL Crude Oil -1.00% 12% -1199% 1.11
IGE Natural Resources (Inc Oil) 0.39% 8% 2126% 1.10
GSG Commodities Index -0.76% 9% -1140% 0.84
VNQ US Real Estate 0.06% 11% 16956% 1.49
RWX International Real Estate -0.95% 8% -864% 1.28
EEM Emerging Markets 0.80% 9% 1136% 1.38
EFA Europe, Australasia, Far East -0.29% 7% -2560% 1.17
VB US Small Cap Stocks 0.19% 8% 4043% 1.24
VV US Large Cap Stocks -0.12% 6% -5081% 1.01
VO US Mid Cap Stocks 0.09% 7% 7555% 1.16
DOW Dow Jones Ind Average -0.23% 5% -2330% 0.90
S&P Standard and Poors 500 -0.34% 6% -1727% 1.00
IXIC NASDAQ 0.19% 7% 3645% 1.12
VGK European Stocks -0.19% 8% -4062% 1.24
VPL Pacific Rim Stocks -0.20% 7% -3239% 1.00
EWJ Japanese Stocks -0.66% 6% -867% 0.81
JXI Global Utilities -0.46% 5% -1170% 0.76
IXJ Global Health Care -0.30% 5% -1697% 0.69
EXI Global Industrials 27.49% 8% 28% 1.25
IXG Global Fin Services -0.96% 10% -1048% 1.58
IAU GOLD 1.38% 6% 426% 0.05
IXC Global Energy 0.13% 7% 5586% 0.99
IXP Global Telecom 0.22% 6% 2663% 0.80
IXN Global Technology 0.15% 7% 4930% 1.17
MXI Global Materials 0.54% 9% 1695% 1.36
IGF Global Infrastructure -0.89% 8% -843% 1.04
KXI Global Consumer Staples 0.20% 5% 2353% 0.69
RXI Global Consumer Discretionary -0.19% 7% -3807% 1.14

 Mutual funds are believed to include all principal asset classes as per S&P
To complement this, we also analyzed a more long term series
from 1988 - 2009
Monthly
returns net of Std dev of
ASSET Rf returns Std Dev/mean Beta
S&P 500 Index Fund 0.003% 4.26% 124837% 1.00
T Rowe Price Nat Resources Fund 0.115% 5.36% 4666% 0.82
Vanguard Precious Metals Index -0.234% 8.63% -3687% 0.66
Fidelity Select Gold Fund -0.117% 9.76% -8340% 0.47
Gold Mutual Fund -0.459% 10.08% -2195% 0.40
T Rowe Price MMKT Fund -0.376% 0.24% -65% (0.01)
Vanguard TIP Bonds -0.328% 1.34% -407% (0.00)
Vanguard Intermediate USD Bonds -0.201% 1.33% -662% 0.00
Vanguard Long Term USD Bonds -0.163% 2.14% -1310% 0.02
T Rowe Price Int'l Bond Fund -0.045% 2.45% -5505% 0.10
Vanguard Hi Yld Corp Bonds -0.078% 2.16% -2753% 0.29
T Rowe Price Emg Mkt Bond Fund -0.577% 0.86% -148% 0.01
T Rowe Price Large Cap Fund -0.370% 4.03% -1088% 0.81
T Rowe Price Mid Cap Fund -0.605% 2.58% -427% 0.27
T Rowe Price Small Cap Fund -0.560% 5.33% -951% 0.85
Vanguard Energy Fund 0.370% 5.95% 1611% 0.75
Vanguard Health Care Fund 0.562% 3.91% 697% 0.69
T Rowe Price Health Sciences Fund -0.123% 5.00% -4065% 0.58
Health Care Average -0.048% 3.77% -7935% 0.52
T Rowe Price Fin Serv Fund -0.514% 4.01% -780% 0.58
T Rowe Price Media + Comm Fund -0.118% 5.82% -4948% 0.97
Fidelity Comp Tech Fund 0.097% 8.96% 9220% 1.57
Fidelity Utilities Fund -0.015% 4.18% -27672% 0.76
Fidelity Utilities Index -0.607% 3.76% -620% 0.49
Fidelity Lat Am Stox Fund -0.199% 5.47% -2752% 0.66
Vanguard Emerging Markets Stox -0.319% 6.04% -1895% 0.94
Vanguard Euro Stox Fund -0.103% 4.62% -4495% 0.82
Vanguard Pacific Stock Index -0.482% 5.45% -1130% 0.66
Fidelity Mtg Backed Sec Fund -0.390% 0.56% -143% (0.01)
Vanguard US REIT Index -0.577% 0.86% -148% 0.01

 Mutual funds are believed to include all principal asset classes as per S&P
It is true that Higher Beta Assets have
higher volatility ….
…higher Beta assets have higher average
returns (with a lot of dispersion) ….
…confirming that higher returns correlate
somewhat with higher volatility
Nevertheless, Beta has some shortcomings
which affect Valuations and Investments
 Measures direction and magnitude of the relationship
between asset returns and the market marker (S&P, MSCI,
Dow Jones, etc.) but does not consider Strength of Fit
(R2) which illustrates the degree of correlation between
the regression equation and the market marker
 Beta’s R2 are generally between 0.4 and 0.8
 Betas vary – in some cases significantly – over the
medium and long terms and according to the time span
measured
 The change in Beta can impact valuations enormously
because of the Re applied
Betas have a large variation in R2 values
presenting some correlation with Beta
Nearly 40% of assets in sample have Betas
with R2’s of .7 or below
Nearly half of the assets have a variation in Beta
greater than 30% of the mean Beta
This low R2 is because 57% of monthly returns fall outside of
the range of +/- 99 % of the mean for each asset….

 Source: Yahoo Finance, Analisis Lambda, based on 30 assets from 2007-2010 ; 40-60 observations each
Most assets show significant variation in 12
month Betas between 2008-2010

 Source: Yahoo Finance, Analisis Lambda, based on 30 assets from 2007-2010 ; 40-60 observations each
Variation in 12 month Betas from 2008-2010 shows a median
Standard Deviation of 10% of the Mean, ranging from – 200% to +
300% ….
Smbl
Smbl ONE
ONE yearyear Betas
Betas Calculator
Calculator 2,010
2,010 2,009
2,009 2,008
2,008 Mean Std Dev
Mean Std Dev StdDev/Mean
StdDev/Mean
TIPs
TIPs Inflation-protected
Inflation-protected Treasuries
Treasuries TIPs
TIPs (0.06)
(0.06) 0.14
0.14 0.25
0.25 0.11
0.11 0.16
0.16 141%
141%
AGG
AGG US
US Bonds
Bonds AGG
AGG (0.09)
(0.09) 0.12
0.12 0.07
0.07 0.03
0.03 0.11
0.11 355%
355%
OIL
OIL Crude
Crude OilOil OIL
OIL 1.34
1.34 0.87
0.87 1.76
1.76 1.33
1.33 0.44
0.44 33%
33%
IGE
IGE Natural
Natural Resources
Resources (Inc(Inc Oil)
Oil) IGE
IGE 1.06
1.06 0.97
0.97 1.31
1.31 1.11
1.11 0.18
0.18 16%
16%
GSG
GSG Commodities
Commodities IndexIndex GSG
GSG 1.01
1.01 0.61
0.61 1.28
1.28 0.97
0.97 0.34
0.34 35%
35%
VNQ
VNQ US
US Real
Real Estate
Estate VNQ
VNQ 0.95
0.95 1.83
1.83 1.60
1.60 1.46
1.46 0.46
0.46 31%
31%
RWX
RWX International
International Real
Real Estate
Estate RWX
RWX 0.99
0.99 1.33
1.33 1.25
1.25 1.19
1.19 0.18
0.18 15%
15%
EEM
EEM Emerging
Emerging Markets
Markets EEM
EEM 1.18
1.18 1.26
1.26 1.38
1.38 1.28
1.28 0.10
0.10 8%
8%
EFA
EFA Europe,
Europe, Australasia,
Australasia, Far
Far East
East EFA
EFA 1.17
1.17 1.21
1.21 1.11
1.11 1.16
1.16 0.05
0.05 4%
4%
VB
VB US
US Small
Small Cap
Cap Stocks
Stocks VB
VB 1.23
1.23 1.26
1.26 1.31
1.31 1.27
1.27 0.04
0.04 3%
3%
VV
VV US
US Large
Large Cap
Cap Stocks
Stocks VV
VV 1.01
1.01 0.99
0.99 1.01
1.01 1.01
1.01 0.01
0.01 1%
1%
VO
VO US
US Mid
Mid Cap
Cap Stocks
Stocks VO
VO 1.09
1.09 1.04
1.04 1.29
1.29 1.14
1.14 0.13
0.13 12%
12%
DOW
DOW Dow
Dow Jones
Jones Ind
Ind Average
Average DOW
DOW 0.90
0.90 0.98
0.98 0.84
0.84 0.90
0.90 0.07
0.07 8%
8%
S&P
S&P Standard
Standard and
and Poors
Poors 500500 SP
SP 1.00
1.00 1.00
1.00 1.00
1.00 1.00
1.00 -- 0%
0%
IXIC
IXIC NASDAQ
NASDAQ IXIC
IXIC 1.23
1.23 0.89
0.89 1.22
1.22 1.11
1.11 0.19
0.19 17%
17%
VGK
VGK European
European Stocks
Stocks VGK
VGK 1.26
1.26 1.27
1.27 1.14
1.14 1.22
1.22 0.07
0.07 6%
6%
VPL
VPL Pacific
Pacific Rim
Rim Stocks
Stocks VPL
VPL 0.88
0.88 1.09
1.09 0.96
0.96 0.98
0.98 0.10
0.10 11%
11%
EWJ
EWJ Japanese
Japanese Stocks
Stocks EWJ
EWJ 0.68
0.68 1.00
1.00 0.80
0.80 0.82
0.82 0.16
0.16 20%
20%
JXI
JXI Global
Global Utilities
Utilities JXI
JXI 0.70
0.70 0.84
0.84 0.73
0.73 0.76
0.76 0.07
0.07 9%
9%
IXJ
IXJ Global
Global Health
Health Care
Care IXJ
IXJ 0.55
0.55 0.83
0.83 0.59
0.59 0.66
0.66 0.15
0.15 23%
23%
EXI
EXI Global
Global Industrials
Industrials EXI
EXI 1.26
1.26 1.37
1.37 1.16
1.16 1.26
1.26 0.11
0.11 8%
8%
IXG
IXG Global
Global Fin
Fin Services
Services IXG
IXG 1.21
1.21 2.00
2.00 1.40
1.40 1.54
1.54 0.42
0.42 27%
27%
IAU
IAU GOLD
GOLD IAU
IAU (0.15)
(0.15) (0.05)
(0.05) 0.05
0.05 (0.05)
(0.05) 0.10
0.10 -207%
-207%
IXC
IXC Global Energy
Global Energy IXC
IXC 1.25
1.25 0.80
0.80 1.11
1.11 1.05
1.05 0.23
0.23 22%
22%
IXP
IXP Global
Global Telecom
Telecom IXP
IXP 0.79
0.79 0.69
0.69 0.78
0.78 0.75
0.75 0.06
0.06 7%
7%
IXN
IXN Global
Global Technology
Technology IXN
IXN 1.31
1.31 0.89
0.89 1.29
1.29 1.16
1.16 0.24
0.24 21%
21%
MXI
MXI Global
Global Materials
Materials MXI
MXI 1.34
1.34 1.27
1.27 1.33
1.33 1.31
1.31 0.04
0.04 3%
3%
IGF
IGF Global
Global Infrastructure
Infrastructure IGF
IGF 0.94
0.94 1.11
1.11 0.95
0.95 1.00
1.00 0.09
0.09 9%
9%
KXI
KXI Global
Global Consumer
Consumer Staples
Staples KXI
KXI 0.68
0.68 0.72
0.72 0.68
0.68 0.69
0.69 0.03
0.03 4%
4%
RXI
RXI Global Consumer Discretionary
Global Consumer Discretionary RXI
RXI 1.19
1.19 1.13
1.13 1.00
1.00 1.11
1.11 0.10
0.10 9%
9%
Median
Median 1.01
1.01 1.00
1.00 1.11
1.11 1.08
1.08 0.11
0.11 10%
10%
 Source: Yahoo Finance, Analisis Lambda
 * Comparison between 12. month Betas during the period
… even though in periods of S&P declines, R2
values for Betas tend to increase

 Source: Yahoo Finance, Analisis Lambda, based on 30 assets from 2007-2010 ; 40-60 observations each
A small reduction/increase in Beta can have a
significant impact on Valuation
 Expected Re= Rf + *(Rm-Rf)
 Re impacts not only the discount rate for the estimated cash
flows, but also the estimation of the perpetuity cash flows
leading to a double impact on values

NLY
PLE O
M
EXA

+30%

-24%
How can Betas be fixed?
One solution is to use longer term Betas, 36 to 48
month Betas vs 12 month
One
One Year
Year Betas
Betas 12
12 to
to 48
48 month
month Betas
Betas
ONE
ONE yearyear Betas
Betas Calculator
Calculator Mean
Mean StdStd Dev
Dev StdDev/Mean
StdDev/Mean Mean Std
Mean Std Dev
Dev StdDev/Mean
StdDev/Mean
Inflation-protected
Inflation-protected Treasuries
Treasuries TIPs
TIPs 0.11
0.11 0.16
0.16 141%
141% 0.15
0.15 0.08
0.08 50%
50%
US
US Bonds
Bonds AGG
AGG 0.03
0.03 0.11
0.11 355%
355% 0.05
0.05 0.01
0.01 23%
23%
Crude
Crude Oil
Oil OIL
OIL 1.33
1.33 0.44
0.44 33%
33% 1.27
1.27 0.33
0.33 26%
26%
Natural
Natural Resources
Resources (Inc(Inc Oil)
Oil) IGE
IGE 1.11
1.11 0.18
0.18 16%
16% 1.13
1.13 0.13
0.13 11%
11%
Commodities
Commodities IndexIndex GSG
GSG 0.97
0.97 0.34
0.34 35%
35% 0.94
0.94 0.23
0.23 25%
25%
US
US Real
Real Estate
Estate VNQ
VNQ 1.46
1.46 0.46
0.46 31%
31% 1.52
1.52 0.06
0.06 4%
4%
International
International Real
Real Estate
Estate RWX
RWX 1.19
1.19 0.18
0.18 15%
15% 1.25
1.25 0.04
0.04 3%
3%
Emerging
Emerging Markets
Markets EEM
EEM 1.28
1.28 0.10
0.10 8%
8% 1.35
1.35 0.06
0.06 5%
5%
Europe,
Europe, Australasia,
Australasia, Far
Far East
East EFA
EFA 1.16
1.16 0.05
0.05 4%
4% 1.17
1.17 0.04
0.04 4%
4%
US
US Small Cap Stocks
Small Cap Stocks VB
VB 1.27
1.27 0.04
0.04 3%
3% 1.26
1.26 0.03
0.03 3%
3%
US
US Large
Large Cap
Cap Stocks
Stocks VV
VV 1.01
1.01 0.01
0.01 1%
1% 1.01
1.01 0.00
0.00 0%
0%
US
US Mid Cap
Mid Cap Stocks
Stocks VO
VO 1.14
1.14 0.13
0.13 12%
12% 1.17
1.17 0.10
0.10 8%
8%
Dow
Dow Jones
Jones Ind
Ind Average
Average DOW
DOW 0.90
0.90 0.07
0.07 8%
8% 0.90
0.90 0.04
0.04 5%
5%
Standard
Standard and
and Poors
Poors 500500 SP
SP 1.00
1.00 -
- 0%
0% 1.00
1.00 -
- 0%
0%
NASDAQ
NASDAQ IXIC
IXIC 1.11
1.11 0.19
0.19 17%
17% 1.12
1.12 0.08
0.08 7%
7%
European
European Stocks
Stocks VGK
VGK 1.22
1.22 0.07
0.07 6%
6% 1.23
1.23 0.06
0.06 5%
5%
Pacific
Pacific Rim
Rim Stocks
Stocks VPL
VPL 0.98
0.98 0.10
0.10 11%
11% 1.00
1.00 0.03
0.03 3%
3%
Japanese
Japanese Stocks
Stocks EWJ
EWJ 0.82
0.82 0.16
0.16 20%
20% 0.83
0.83 0.03
0.03 4%
4%
Global
Global Utilities
Utilities JXI
JXI 0.76
0.76 0.07
0.07 9%
9% 0.76
0.76 0.02
0.02 3%
3%
Global
Global Health
Health Care
Care IXJ
IXJ 0.66
0.66 0.15
0.15 23%
23% 0.68
0.68 0.06
0.06 9%
9%
Global
Global Industrials
Industrials EXI
EXI 1.26
1.26 0.11
0.11 8%
8% 1.25
1.25 0.07
0.07 5%
5%
Global
Global Fin
Fin Services
Services IXG
IXG 1.54
1.54 0.42
0.42 27%
27% 1.57
1.57 0.13
0.13 8%
8%
GOLD
GOLD IAU
IAU (0.05)
(0.05) 0.10
0.10 -207%
-207% 0.01
0.01 0.06
0.06 438%
438%
Global Energy
Global Energy IXC
IXC 1.05
1.05 0.23
0.23 22%
22% 1.02
1.02 0.06
0.06 6%
6%
Global
Global Telecom
Telecom IXP
IXP 0.75
0.75 0.06
0.06 7%
7% 0.77
0.77 0.03
0.03 4%
4%
Global
Global Technology
Technology IXN
IXN 1.16
1.16 0.24
0.24 21%
21% 1.18
1.18 0.09
0.09 8%
8%
Global
Global Materials
Materials MXI
MXI 1.31
1.31 0.04
0.04 3%
3% 1.34
1.34 0.02
0.02 2%
2%
Global
Global Infrastructure
Infrastructure IGF
IGF 1.00
1.00 0.09
0.09 9%
9% 1.02
1.02 0.05
0.05 5%
5%
Global
Global Consumer
Consumer
Global Staples
Staples KXI
KXI 0.69
0.69 0.03
0.03 4%
4% 0.69
0.69 0.01
0.01 2%
2%
Global Consumer
Consumer
Discretionary
Discretionary RXI
RXI 1.11
1.11 0.10
0.10 9%
9% 1.11
1.11 0.08
0.08 7%
7%
Median
Median 1.08
1.08 0.11
0.11 10%
10% 1.07
1.07 0.06
0.06 5%
5%

 Source: Yahoo Finance, Analisis Lambda

Over the long term, however, even 36
month Betas are not stable

 Source: Yahoo Finance, Analisis Lambda

Volatility in 36 month Betas over the Long Term (20 yrs) can be
up to five or six times greater than observable in Short Term (3
yrs)

Analisis of Betas (2007-2010) 1987-2009

Asset Class Minimum Maximum Mean Std Dev Std/Mean Minimum Maximum Mean Std Dev Std/Mean
Inflation-protected Treasuries 0.07 0.25 0.15 0.08 50% (0.33) 0.18 (0.03) 0.08 -231%
US Bonds 0.04 0.07 0.05 0.01 23% (0.18) 0.28 (0.01) 0.10 -1626%
Natural Resources (Inc Oil) 1.01 1.31 1.13 0.13 11% 0.54 1.42 0.80 0.20 25%
US Real Estate 1.47 1.60 1.52 0.06 4% (0.09) 0.11 0.00 0.03 680%
Emerging Markets 1.25 1.38 1.35 0.06 5% (0.00) 1.90 0.83 0.63 75%
US Small Cap Stocks 1.24 1.31 1.26 0.03 3% (0.00) 1.65 0.71 0.62 87%
US Large Cap Stocks 1.00 1.01 1.01 0.00 0% (0.00) 1.19 0.67 0.49 73%
US Mid Cap Stocks 1.06 1.29 1.17 0.10 8% (0.00) 1.40 0.21 0.44 206%
European Stocks 1.14 1.28 1.23 0.06 5% (0.00) 1.28 0.75 0.30 40%
Pacific Rim Stocks 0.96 1.02 1.00 0.03 3% 0.00 0.98 0.59 0.24 41%
Global Utilities 0.73 0.78 0.76 0.02 3% 0.13 1.09 0.69 0.21 30%
Global Health Care 0.59 0.73 0.68 0.06 9% 0.27 1.20 0.74 0.25 33%
Global Fin Services 1.40 1.70 1.57 0.13 8% (0.00) 1.26 0.45 0.47 105%
GOLD (0.08) 0.05 0.01 0.06 438% (0.22) 1.73 0.41 0.52 126%
Global Energy 0.98 1.11 1.02 0.06 6% 0.33 1.36 0.76 0.20 27%
Global Technology 1.07 1.29 1.18 0.09 8% 0.89 2.38 1.61 0.37 23%
Median Value 1.01 1.19 1.07 0.06 7% (0.00) 1.27 0.68 0.27 41%

Long term, Beta values vary significantly for individual assets

 Source: Yahoo Finance, Analisis Lambda * Rolling 36 month Betas vs 12, 24, 36 and 48 month Betas
Analyzing a 20 yr history of Betas* for a broader portfolio shows
an even broader variation in Betas- Standard Deviations of
119% of Means
Analisis of Rolling 36 mos
Betas(1987-2009) Minimum Maximum Mean Std Dev Abs Std/Mean
Vanguard TIP Bonds (0.33) 0.18 (0.03) 0.08 18%
Vanguard Intermediate USD Bonds (0.17) 0.21 (0.01) 0.08 21%
Vanguard Long Term USD Bonds (0.19) 0.35 (0.01) 0.12 35%
T Rowe Price Nat Resources Fund 0.54 1.42 0.80 0.20 142%
Vanguard US REIT Index (0.09) 0.11 0.00 0.03 11%
Vanguard Emerging Markets Stox (0.00) 1.90 0.83 0.63 190%
T Rowe Price Small Cap Fund (0.00) 1.65 0.71 0.62 165%
T Rowe Price Large Cap Fund (0.00) 1.19 0.67 0.49 119%
T Rowe Price Mid Cap Fund (0.00) 1.40 0.21 0.44 140%
Vanguard Euro Stox Fund (0.00) 1.28 0.75 0.30 128%
Vanguard Pacific Stock Index 0.00 0.98 0.59 0.24 98%
Fidelity Utilities Fund 0.13 1.09 0.69 0.21 109%
Vanguard Health Care Fund 0.27 1.20 0.74 0.25 120%
T Rowe Price Fin Serv Fund (0.00) 1.26 0.45 0.47 126%
Gold Mutual Fund (0.22) 1.73 0.41 0.52 173%
Vanguard Energy Fund 0.33 1.36 0.76 0.20 136%
Fidelity Comp Tech Fund 0.89 2.38 1.61 0.37 238%
Vanguard Precious Metals Index (0.32) 1.81 0.56 0.51 181%
Fidelity Select Gold Fund (0.28) 1.80 0.52 0.48 180%
Fidelity Lat Am Stox Fund (0.00) 2.14 0.57 0.73 214%
Fidelity Mtg Backed Sec Fund (0.07) 0.05 (0.01) 0.03 5%
Fidelity Utilities Index (0.00) 1.03 0.38 0.41 103%
Health Care Average (0.00) 0.91 0.43 0.32 91%
T Rowe Price Emg Mkt Bond Fund (0.09) 0.11 0.00 0.03 11%

T Rowe Price Health Sciences Fund (0.00) 1.14 0.49 0.37 114%
T Rowe Price Int'l Bond Fund (0.27) 0.35 0.10 0.13 35%
T Rowe Price Media + Comm Fund (0.00) 1.62 0.78 0.69 162%
T Rowe Price MMKT Fund (0.01) 0.01 0.00 0.00 1%
Vanguard Hi Yld Corp Bonds 0.08 0.69 0.24 0.10 69%
Median (0.00) 1.19 0.49 0.30 119%

 Source: Yahoo Finance, Analisis Lambda * Rolling 36 month Betas

Fantasy Assets as an Illustration
We developed Fantasy Assets to illustrate asset descriptions and
understand comparative Asset behavior….

Asset A Asset B Asset C Asset D Asset E Asset F Asset G

Minus S&P .2% Fixed ret 75% of S&P 125% of S&P Random Dephased S&P Mix .75+1.25
… it seems that Beta is not a completely good descriptor for this
Fantasy Asset behavior

• Random portfolio has same Average Return as S&P with

similar Std Dev, but much lower Beta
• Assets with low correlation to S&P receive low Betas
• Dephased S&P has same Average Return and Std Dev but
much lower Beta
The StdDev of asset returns to their Mean is significantly lower
than the Std Dev of their Betas

230%
66%
For many investors,eliminating Idiosyncratic risk
from consideration is not attractive or possible
 Active investors in firms
– publicly traded or not-
whose portfolio is not
diversified

 Individuals or institutions
looking to evaluate
investments as a stand
alone proposition,
independent of other
portfolio holdings
Proposed Methodology for Total Risk applied to Fantasy Assets
leads to a much better understanding of their performance
 Systematic Risk (Beta) X Beta R2 •Random portfolio has same Average
= Contribution to total risk Return as S&P with similar Std Dev,
but now has Total Risk in line with Std
 Idiosyncratic Risk* X (1-Beta R2)
Dev
= Contribution to total risk
•Dephased S&P has same Average
 Total Risk = Sum of both above Return and Std Dev as S&P but now
* Defined as Std Dev of Asset/Std Dev of S&P has similar Total Risk measurement
(as Market Marker)

Asset A Asset B Asset C Asset D Asset E Asset F Asset G

.2% Fixed 75% of 125% of
Minus S&P ret S&P S&P Random Dephased S&P Mix .75+1.25
Total Risk evaluation of asset with Random
returns reflects true risk better than Beta
Total Risk evaluation of asset with returns 1 month dephased
from S&P reflects also true risk better than Beta