Giddy/NYU Foundations of Finance Course

Professor Ian Giddy's Foundations of Finance

Portfolio Management Game

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)

2. Selections must be made by the second class and given or emailed to the instructor at portfolio@giddy.org. You may change your portfolio as often as you wish, but every transaction costs money. Changes must be made through Stock-Trak. You should remain fully invested. Keep your selections to 5-10 instruments. Don't know where to start? Look at morningstar.com or lipperweb.com for some top-performing funds and fool.com for stock ideas.

3. Portfolio performance reports, three brief (1-2 pages) on-paper reports. Use of a spreadsheet program such as Excel is recommended.

First Report:

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/

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

Second Report:

For each security,

price level and performance
the betas of each security

For the whole portfolio, your comparison should include an estimate of portfolio beta and the return-to-risk ratio.

Estimate the degree of diversification by breaking stocks into sectors and looking up the correlation coefficients at creditmetrics.com ("correlation engine"). You also can obtain more disaggregated 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.

Third Report:

For each security,

price level and performance
the betas of each security

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)

contribution of asset allocation to performance
contribution of stock selection to performance

Note: you can get charts and downloadable data on the benchmark components (FUSEX and VUSTX) at quote.yahoo.com/

4. Grading will be based solely on the logic and consistency of your selections and reports. You will not be graded on the basis of investment performance; rather, you will be expected to:

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.

A note on bonds
If you want to invest a certain dollar amount in particular bonds, you need to know the price. Stocktrak tells you which bonds are available for purchase on its "read the rules" section. You can find bond price quotes at bondsonline.com. This site enables you to quickly enter criteria (such as maturity in years for Treasurys, or the company's name for corporates) and get a price.

Date	Task	Remarks
Sept 13	Turn in initial portfolio selection	Deadline: 6pm. Can be very simple. Hand in in class (9/13) or email to portfolio@giddy.org.
Sept 11	First available trading day	Place your orders at Stock-Trak. Details here.
Oct 4	Turn in 1st performance report	Deadline: start of class
Oct 25	Turn in 2nd performance report	Deadline: start of class
Dec 6	Turn in final performance report	Deadline: start of class

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

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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Go to Giddy's Web Portal • Contact Ian Giddy at ian.giddy@nyu.edu