This project is intended to make you an interested participant in the financial markets, and so gain some understanding of the markets and of investment decisions. You will use a trading simulation program, Stock-Trak, to manage a portfolio that can consist of bonds, equities and/or mutual funds during the course. The goal will be to beat a passive $500,000 portfolio of 50% equities, 40% bonds, and 10% cash. Students will apply the concepts learned in the course to select which bonds, stocks or mutual funds to buy and which to sell, and to evaluate the relative performance of the portfolio.

For background, read Bodie, Kane and Marcus, Essentials of Investments, Ch 19 and Appendix A. Also Ch 11.

Rules of the Game

1. You have an initial $500,000 to invest in the securities of your choice. The goal is to beat a passive benchmark portfolio consisting of
 

• 40% long term government bonds
• 50% U.S. equities (an "index fund")
• 10% cash (short-term money market instruments)

1. First Report:
1. for each security in your portfolio,
• price level and change
• a measure of historical return. I suggest 5 years.
• a measure of the security's risk -- if possible, the standard deviation of returns. I suggest 5 years of monthly data. You can obtain data from the Microsoft Investor site, http://investor.msn.com/research/welcome.asp (use "charts" to download data) or from Yahoo at http://quote.yahoo.com/
1. For the whole portfolio,
• total portfolio gain/loss in dollar and percentage terms
• a comparison to the benchmark portfolio's actual and percentage gain/loss
2. Second Report:
1. For each security,
• price level and performance
• the betas of each security
2. For the whole portfolio,  your comparison should include an estimate of portfolio beta and the return-to-risk ratio.
• Estimate the degree of diversification of your portfolio, using the tools of portfolio diversification. One way is by registering  at riskgrades.com and plugging in your current portfolio as well as checking the effect of changing the weights. You also can obtain sector performance results from the various sector indexes at bigcharts.com
• Find the portfolio beta
• Find the portfolio expected return, using the T-bill rate as the risk-free rate and 12% as the market return
• Measure the portfolio's excess return: the difference between the actual and the expected.
3. Third Report:
1. For each security,
• price level and performance
• the betas of each security
2. For the whole portfolio,  your goal is perfomance analysis:
• Measure absolute performance
• Measure performance relative to the benchmark portfolio
• Measure performance relative to the risk-adjusted expected return, based on your portfolio's average beta
• Use the Sharpe, Treynor and Jensen measures. You'll need the beta, average return and standard deviation of your portfolio and of the benchmark. For a sample see the spreadsheet, benchmark.xls
• Conduct a performance attribution analysis (see chapter in textbook)
1. contribution of asset allocation to performance
2. contribution of stock selection and bond selection to performance
Note: you can get charts and downloadable data on the benchmark components (FUSEX and VUSTX) at quote.yahoo.com/

• set investment goals
• track your portfolio's performance, and that of the benchmark portfolio, each week
• prepare for classroom discussion of important events in the markets that may affect the risk or return performance
• produce performance reports on schedule.

 
More Information (rough guidelines -- see Stocktrak website)

What is Stock-Trak?
Stock-Trak is a Web-based investment simulation program used by Finance students across the USA. It offers the closest thing to real-money trading: gain experience without the pain.

How do I sign up?
Send in the registration form with a check or use a credit card to sign up and start trading immediately at the Stock-Trak Website. The cost is about $18.

What securities can we trade?
Students can trade any NYSE, AMEX or NASDAQ stocks with traded prices above $5, a selection of government and corporate bonds, a large sample of the most popular mutual funds, and a number of international stocks. In short, the kinds of investments offered by a good US discount brokerage firm.

How, when and how often can we trade?
Stock-Trak offers several methods for students to place trades: Phone-call to a broker, 24-hour voicemail, E-mail or fax. You can even put in your trades in real time directly from the Stock-Trak Web trading pit at a commission discount. Each account is limited to 60 trades for the term. No odd-lot trades are permitted. No limit orders. You'll need to know the ticker symbol of your stock or fund.

What are the costs of trading?
Basic commission cost is $50 plus $5 per 100 share lots of stock; $50 plus $5 per bond (par value of $1000); and 1% front-end load fee for mutual funds, which must be taken in $500 units.

Can we margin up a position? Are short sales permitted?
Not at this point--let's keep the parameters reasonable at first. After the midterm exam you can try it; the details may be found at the Stock-Trak Web Site.

Can we employ options, futures or other derivatives?
Again, after the midterm. Try to relate your portfolio to the course coverage.
See the the Stock-Trak Web Site for information about futures and options.

What about cash distributions?
Your account will be credited for any dividends or coupons above $.50 or stock dividends above 2%. Check Section C of the Wall Street Journal for such announcements.

Does Stock-Trak provide summary information?
Every two weeks the investor in whose name the account is registered will receive an account summary via mail or E-mail, if requested. The portfolio will be valued on the basis of actual market prices. I will receive a summary statement every week with a class ranking, which can also be found on the Web.

Online Investment Help

Try the following Web sites:
 
• CNN Finance • The Financial Times • The Economist • Bloomberg • Reuters • The Motley Fool • Microsoft Investor • Dailystocks
• and much more at Giddy's Finance Resources on the Web

 

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