Question

Beta is a measure of systematic risk. It is a relative risk measure to show you how sensitive the stock price is related to market movement, i.e., the S&P 500 index. When calculating beta, you need to regress y (stock return) against x (S&P 500 index return) and the coefficient of the x is the beta, please refer to the excel posted on module 6.

I would like you to comment on the betas of the following ETFs: UGAZ, TVIX or NUGT. You can use the Bloomberg or MarketWatch, or google to find the discussion of any of the three ETFs and /or then calculate what the expected or required return for the above ETF is appropriate to compensate for the risk you are bearing when investing in the three ETFs.

You can focus on your discussion on one of the ETFs I mentioned above. Please include the source into your post.

Answer 1

Betas of three given funds:

UGAZ: 5 year beta: 1.76

TVIX : 5 year beta: 1.9

NUGT: 5 year beta: -0.46

Betas more than 1 indicates the funds carry more risk than the underlying market and hence higher return is expected of the funds.

Negative beta indicates the fund moves the opposite side of the market i.e. when market increase the fund value decrease and vice versa.

We are going to choose one ETF i.e. TVIX with underlying asset of S&P 500 short term futures index

5 year Beta of the fund is 1.9 (source: yahoo finance)

Required rate of return can be calculated using Capital Asset Price Model(CAPM)

Required rate = risk free rate + Beta*(Market rate - Risk free rate)

From the bloomberg study it is found out that the particular fund provides double the return of underlying market