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Rebalancing the Russell Indices: Beta and Volatility
Evans, Richard B.; Schill, Emily Case F-1938 / Published July 27, 2021 / 8 pages.
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Product Overview

This case examines the role of beta and volatility in assessing the risk of a portfolio. Students assume the role of a fund manager who is adjusting their portfolio in response to the 2014 reconstitution of the fund’s benchmark—the Russell 2000 index. The manager chooses between two stocks recently added to the index (and correspondingly to the manager’s investment universe): First Citizens Bancshares, Incorporated, and Innoviva, Inc. Under the assumption that the manager’s assessment of the future performance of both stocks is similar, students have to determine which stock will increase the risk of the portfolio more. Students are tasked with calculating the beta and standard deviation for the stocks individually and as part of the manager’s portfolio, and then choosing which stock to add to the portfolio. The case also introduces the concepts of benchmarking and the construction and rebalancing of market indices.


Learning Objectives

1) Calculating and understanding the differences between beta and standard deviation risk measures. 2) Learning how to analyze the impact of adding stocks to a portfolio. 3) Understanding the concept of a market index and how such indices are constructed and rebalanced. 4) Exploring why benchmarks are important for investment managers.

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  • Overview

    This case examines the role of beta and volatility in assessing the risk of a portfolio. Students assume the role of a fund manager who is adjusting their portfolio in response to the 2014 reconstitution of the fund’s benchmark—the Russell 2000 index. The manager chooses between two stocks recently added to the index (and correspondingly to the manager’s investment universe): First Citizens Bancshares, Incorporated, and Innoviva, Inc. Under the assumption that the manager’s assessment of the future performance of both stocks is similar, students have to determine which stock will increase the risk of the portfolio more. Students are tasked with calculating the beta and standard deviation for the stocks individually and as part of the manager’s portfolio, and then choosing which stock to add to the portfolio. The case also introduces the concepts of benchmarking and the construction and rebalancing of market indices.

  • Learning Objectives

    Learning Objectives

    1) Calculating and understanding the differences between beta and standard deviation risk measures. 2) Learning how to analyze the impact of adding stocks to a portfolio. 3) Understanding the concept of a market index and how such indices are constructed and rebalanced. 4) Exploring why benchmarks are important for investment managers.