Equity Markets and Institutions Project

The primary goal of the project is to gain an understanding of the investment process by becoming an interested participant. Students will participate in a portfolio simulation exercise by trading an initial wealth of $500,000.

Can we play the game in a group?

You can form groups of two, or play the game on your own, as you prefer. Each group of two needs only one Stock-Trak account.

What is the goal of the investment simulation?

Your goal is to maximize your risk-adjusted return, defined as the Sharpe ratio of your portfolio. Requirements for each student include: (1) tracking the performance of their portfolio each week through the semester; (2) being prepared for classroom discussion of macroeconomic, financial market, or other news events that might affect the risk and return of their portfolios; and (3) producing a report analyzing the performance of their portfolio over the semester. More details about the report are on the next page.

If it’s a game, who wins?

I’d like to think we’re all winners, but the investors who achieve the highest risk-adjusted return (as measured by the Sharpe ratio of their portfolio) will get an extra 5 points on their (50 point) Stock-Trak Report #3.

What assets can we trade?

Only common stocks, mutual funds and ETFs can be traded in the game (no bonds, no derivatives, no exceptions).

How do we trade?

Stock-Trak offers Web trading; details are in the registration materials or on the Web. Your account is limited to 200 trades for the semester; market orders and limit orders are allowed.

Do we ha-a-a-ve to trade? (often asked in a whiny voice)

Yes. Each investor group must execute at least 20 trades (defined as a purchase or short sale of a stock, mutual fund, or ETF) over the course of the game. For each trade short of this goal you will lose 2 points on your (50 point) Stock-Trak Report #3. See the Stocktrak Strategies handout for some ideas on how to get started. Note: a purchase and subsequent sale of a stock counts as one trade.

How do we track our performance?

Tracking your weekly performance using Stock-Trak’s web site is the best way to go. Registering and setting up a portfolio list in Yahoo! Finance (or any other financial web site that you are familiar with) seems like the easiest way to keep track of real-time news about any stocks that you have traded.

What should we do right away?

1. Download and read the Stock-Trak rules (link is on class page).
2. Register with Stock-Trak (on their Web site) as soon as possible to get ready to trade.
3. Begin tracking the week-to-week performance of both your portfolio and your benchmark, including saving any news items you find regarding your stocks. Friday closing values will be needed to write your reports.
4. Collect print or Internet articles that discuss your stocks and/or investment strategies. These will come in handy, for reference purposes, in writing your reports.
5. Do not hesitate to talk to me about any issues or questions I have omitted.

A Brief yet Helpful Guide to the TPS[1] reports

For all reports, graphs, tables and charts that support statements made in your report should be placed in an appendix and should not be included in the page count for the report.

Report 1 (due 10/7; 2 pages max) 6% of final grade

• Discuss your beginning portfolio strategy and security selection process. What index are you going to try to beat with your stock picks? Why did you pick that index?

• In an appendix, present a “timeline” or chronicle of each of your trading decisions, and the thought process behind each trade. If you used a stock screener to pick stocks, be specific about the screens you used.

Report 2 (due 11/4; 2 pages max) 6% of final grade each

• How did your portfolio/stock picking strategy change during this session, either in response to concepts discussed in class, or in response to economic (market, industry, or company-specific) events during the semester?
• In an appendix, present a “timeline” or chronicle of each of your trading decisions, and the thought process behind each trade. If you used a stock screener to pick stocks, be specific about the screens you used.

Report 3 (due 12/2; 5 pages max) 13% of final grade

Your final report should contain three main sections:

1. Returns analysis

• Compute the average weekly return on your portfolio and your benchmark.

• Did you beat the benchmark you selected at the beginning of the quarter?
• Which three securities were your biggest winners? Which three were your biggest losers? Measure winners and losers in percent, not dollars. What were the firm-, industry- or market-related events that led to the extreme performance of these six stocks? Be specific. You may include print or Internet articles that support your analysis in your appendix.

2. Risk analysis

• Compute the s of your portfolio’s and your benchmark’s weekly returns, as well as your portfolio’s b (using your benchmark index as “the market”).
• On a risk-adjusted basis, did you beat your benchmark? Compute both the Sharpe ratio and Treynor measure. Which of these measures is most appropriate for evaluating your performance? (Think about what the R² of your portfolio beta regression tells you about this last question.)
• Compute your up-market and down-market betas. Were you good market timers or bad market timers?

3. Conclusions

• Conclude with a critique of your portfolio – what would you have done differently knowing what you know now? This does not mean using perfect hindsight to decide what stocks you should have purchased! Rather, suppose you were starting Stock-Trak today. Given your current knowledge of the stock market compared to earlier in the semester, what would you have do differently in terms of your portfolio strategy and your security selection process? What lessons from the game will be useful as you save for retirement?

Remember that NONE of the project grade is related to how much money you made or lost! Your grade will be based on a clear and concise discussion of what happened during the semester. Good reports will also successfully incorporate concepts highlighted in the course.

[1]TPS = Tracking the Performance of Stocks. Be sure that your reports have the right cover page.