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The purpose of this project is to give each student the opportunity to learn more about investing and portfolio management by building, monitoring and maintaining a portfolio, analyzing the portfolio’s performance, and writing a report. The investment choices, prices and performance are real; the money is not. There are some requirements, but for the most part each student or team (see below) may decide how risky or safe to make the portfolio, which types of investments and specific investments to include, how often to trade and so on. You will not be graded on your investment returns.

Portfolio Project Overview

The purpose of this project is to give each student the opportunity to learn more about investing and portfolio management by building, monitoring and maintaining a portfolio, analyzing the portfolio’s performance, and writing a report. The investment choices, prices and performance are real; the money is not.

There are some requirements, but for the most part each student or team (see below) may decide how risky or safe to make the portfolio, which types of investments and specific investments to include, how often to trade and so on. You will not be graded on your investment returns.

Detailed Requirements

Beginning of the Semester Tasks

  1. Decide whether you want to work by yourself or as a team with one other student in this section (in which case go ahead and find someone).1 Team members share a Stocktrak account and co-manage one portfolio but still write two individual reports.

  2. Purchase an account by yourself or with your partner. The book code BKM0810 may reduce your cost. If you are working alone, you need your own account. A team is to share one account. Be sure to include both partners’ names in the account. You can start investing immediately.

Read the information on the Stocktrak web site so that you become familiar with how it works. Should you have questions Support Services Department can be reached at 1-800-786-8725 or use the Support Services Form by selecting FAQs in the About section of the menu. Adjust your e-mail client spam filters to accept e-mails from http://www.stocktrak.com.

  1. Think about, and discuss with your co-manager if any, the investment style and goals you want to pursue. This is up to you and you may change your mind over the course of the project.

  2. You will need a U.S. Treasury security to use as a risk-free rate proxy. This is not an investment (though you are free to invest in the security as well) but a benchmark for the return that could have been earned on a riskless investment. (You could buy a T-bill and use its price and rate of return on a daily basis as a risk-free return. Alternatively, there are mutual funds focusing on US government securities or possibly the Federal Reserve.) To make things more straight forward use ^IRX at http://finance.yahoo.com which is either a 13-week T-Bill fund or index. It provides historical information on a daily basis you can download. In the “price” column is a number such as 0.04 which is the discount rate for the Treasuries on that day. This means the risk-free rate on that day is 0.0004. Notice it is the discount RATE not discount.

  3. You will also need a market index. The daily index value of the Russell 3000® index (with dividends) which is a broad-based index and can be downloaded from http://www.russell.com/indexes/data/US_Equity/Russell_US_index_values.asp.

Requirements to be Completed during the Project Trading Period

  1. Any day before, or no later than 2 p.m. on, 9/4/2012, make the following trades. You may meet these requirements by trading on just one day or more than one day, by investing only the minimum required amounts of money or by investing more, and by investing in a single stock, fund, option, futures or bond or spreading the minimum or larger amount of money over multiple ones. Numbers of days below are calendar, not trading, days.

    1. Invest at least $100,000 in common stock(s); you may choose any common stocks except ETFs, ETNs, closed-end funds or stocks that are part of the Dow Jones 30. You are free to invest in ETFs, ETNs, closed-end funds and Dow 30 stocks as long as you meet the $100,000 requirement without them. Hold at least 7 days (and as long as you like).

    2. Invest at least $100,000 in at least one mutual fund; money market funds don’t fulfill this requirement. Hold for at least 14 days (and as long as you like).

    3. Invest at least $100,000 in at least one bond issue. Debt securities not specifically designated as bonds (for example, notes, subordinated debentures, commercial paper) are okay, but no T-bills for the purpose of meeting this requirement. Hold for at least 21 days.

  1. a. Any day before, or no later than 2 p.m. on, 9/10/2012, sell short at least $10,000 of one stock. You may use any stock but those traded on the NYSE or Nasdaq are probably most likely to be executed. Be aware that sometimes a short sell order remains unfilled. Monitor your order; if it does not get filled in a trading day or two, cancel it and try a different stock.
    b. Hold the short position open for at least 21 days, except you may choose to cover sooner if you receive a margin call, or if a price target that you decided on before placing the short sale order is reached.
    c. You must cover the required short position after 21 days. You are free to have other short positions that you leave open if you want to do so.

  2. a. Any day before, or no later than 2 p.m. on, 9/20/2012, take four positions in options (at least one contract each): i) buy call options; ii) buy put options; iii) short (or write) call options and iv) short (or write) put options. Each position can be on a different stock. You may use any stock but those traded on the NYSE or Nasdaq are probably most likely to be executed. Monitor your order; if it does not get filled in a trading day or two, cancel it and try a different stock. ALSO, choose options that have a longer maturity. Those that are near maturity are very illiquid.
    b. Hold the positions open for at least 14 days, except you may choose to cover sooner if you receive a margin call, or if a price target that you decided on before placing the order is reached.
    c. You must cover (or close) the positions after 14 days. You are free to have other put and call positions that you leave open if you want to do so.

  3. a. Make a total of at least 20 trades, counting the required trades. Round-trips do not count as two trades. You can make up to 200 trades per portfolio. Beyond the required trades, you are free to use long and short positions and all types of investments available in Stocktrak.
    b. When you make a trade, keep a record of your reasoning behind the specific choices you make. It’s perfectly okay to make some trades for the purpose of experimentation.

  4. Take lots of risk if you want, but limit risk enough to a) be able to make all the required trades on schedule and b) keep your portfolio’s value above $200,000.

Tasks to Complete During the Trading Period

Record the daily total value of your portfolio at the market close each day the market is open. Your portfolio value is initially $1,000,000. If the portfolio value is different from $1,000,000 then record the market portfolio value as of the close of 8/31/2012.

Calculate the daily holding period returns of the portfolio, Russell 3000 and risk-free proxy. As stated earlier the Russell 3000 index and risk-free proxy can be downloaded and returns calculated as needed.

On or before midnight, 10/30/2012, submit through Blackboard the Excel workbook.
The tables and chart must be turned in all in one Excel file uploaded through the designated Blackboard assignment only. Team members may agree to work together on this to any desired degree. Make sure your both name(s) are in the file name and in the file. The Excel file results and the daily data used to derive them should be included. Label everything so that I can tell at a glance what is being shown. See below for a description of the tables and chart. You won’t be penalized for mistakes now as long as I see an appropriate effort. This is your chance to get feedback.

Tasks at the End of Trading

  1. Except for the required short position, puts and calls should all be closed or by the end of the final trading period (11/16/2012). You may leave other positions open or close them out.

  2. On or before midnight, 11/29/2012, submit through Blackboard the project. The tables and chart must be turned in all in one Excel file uploaded through the designated Blackboard assignment only. The Excel file results and the daily data used to derive them should be included. Label everything so that I can tell at a glance what is being shown. Even if it is a team file, this time each student needs to submit a copy through Blackboard.

  3. Each student must write and submit (via the appropriate Blackboard assignment only) an individual paper. A team may agree to jointly calculate the required measures and jointly construct the tables and graphs, then include the same ones in both reports, but any team member may choose to do this work separately. The written portion must be each student’s own work, but team members are free to communicate about the general concepts to be included if they so choose.

Use Microsoft Word (any version). There should be a title page, table of contents, a proper introduction, and then the written discussion. For the discussion sections see the section on page 5 “Divide the written discussion into the following sections:” Use a 12 point font. Use at least one inch margins all around. Put the tables and graph at the end and number all the pages. Please save and submit the final draft both as a word document (doc, docx) and a PDF, which you can do easily in Word 2007, 2010 or 2011 (using Save As). If you absolutely cannot create a PDF, then just submit a Word file format. The entire “paper” (including tables and figures) must be all in one file submitted through the designated Blackboard assignment. In total there should be three documents: the Excel file, Word document, and pdf of the Word document.

Include the following. The tables are listed first below because you probably will work on them first, not because they should appear first in the paper. Tables and figures can be assembled at the end of the paper (figures first, then tables is the customary order) or inserted in the body about where they are first discussed. Either way, the tables and figures must be separately numbered.

  1. Table 1 showing the performance of the portfolio as a whole by for each trading day. The days should be reported on separate table rows. Include the following columns: closing value of the portfolio, daily rate of return of the portfolio, daily rate of return of the Russell 3000 Index, daily rate of return of the Treasury security used as the risk-free proxy.

  2. Table 2 showing the following for the whole trading period (you don’t need to follow the outline order or numerals shown below as long you report all the results):
    i. arithmetic average daily return of the portfolio
    ii. geometric average daily return of the portfolio
    iii. arithmetic average daily return of the risk-free proxy
    iv. geometric average daily return of the risk-free proxy
    v. arithmetic average daily return of the Russell 3000
    vi. geometric average daily return of the Russell 3000
    vii. standard deviation of daily return of the portfolio
    viii. standard deviation of daily return of the Russell 3000
    ix. beta of the portfolio calculated using the daily portfolio returns and daily Russell 3000 returns
    x. Sharpe ratio of the portfolio calculated using the relevant geometric averages
    xi. Sharpe ratio of the Russell 3000 calculated using the relevant geometric averages

  3. Table 3 showing the positions created by the required trades and other trades. Report each position on a separate row. You may want to learn how to insert a section break in Word and format the section containing this table in landscape orientation. Include the following columns: the security or company name (Google), ticker symbol (GOOG), brief description of the security and whether the position was long or short (for example long equity, short equity, long bond, long call, short put), the date the position was established, the number of calendar days the position exists, the date closed out if applicable, the market value of the trade establishing the position, the market value of the trade made to close out the position if applicable and a brief summary of the reason for the position. For the reason, do not write something like “required trade”, but instead briefly summarize your rationale for the transaction in a particular security (for example hedge against stock price decline held in portfolio). If the position was not closed on or before 11/29/2012, show the value at the market close on 11/29/2012.

  4. Figure 1: A graph showing the portfolio returns and the Russell 3000 returns over the period.

  5. Optional: additional figures or tables that you have a specific reason and desire to include. This option is listed only to let you know you are not limited to the required figure and tables, not to suggest that you need more.

  6. The written discussion. Make this your best writing, with a professional style, correct grammar, spelling, punctuation and word usage, and clear, informative, interesting content. Each table and graph should “stand-alone” and be discussed and referred to by its designation (Table 1 etc.) in the written portion. Remember to properly attribute any material that is not original. There is no minimum or maximum number of pages; avoid omitting important information and discussion but avoid verbosity.

Divide the written discussion into the following sections (Don’t forget Communications Center if you think they will be helpful):

Introduction. Briefly explain what the report is about. Don’t go into too much detail here.

Investment goals. This section can be one paragraph. Briefly summarize the investment objectives (not learning objective) you were trying to meet overall. If you weren’t sure in the beginning, summarize the investment style you ended up following. There is no wrong objective or style as long as you took the project seriously.

Portfolio performance and risk. Base this partly on table 1. Make this section factual, but explain or interpret as you present the numbers. Discuss major market-wide events or trends that may have affected the portfolio as a whole. Summarize whether the portfolio’s performance was affected more by the overall market or by the specific positions you took. In this section, the next section or both, apply the theories we have studied in the course when possible.

Trading performance. Base this in part on table 2. Don’t discuss every trade, but discuss the required short position and option positions, one long position each in a common stock, mutual fund and bond, and one to three other selected positions or trades that had particularly strong performance or had a large influence on the overall results. Explain why the performance of each position or trade met or deviated from your expectations. Briefly discuss the reasons for your trading pattern, e.g., why you chose to cluster your trades in a short time or spread them out over time, why you chose to make about the minimum number of trades or more.

Blackboard Submission

The paper must be submitted through Blackboard “Assignments.” Everything must be combined into one document for submission. If you have trouble uploading, try signing out of Blackboard, closing the browser, waiting five minutes and starting over. If you have the paper on a USB, try copying the file to the desktop and uploading. Rebooting your own computer or switching to a different lab computer could help. E-mail or hard copy submission won’t be accepted. Blackboard works fine except for occasional hiccups that pass quickly, so there should be no need for an alternative method.

Paper Grading Criteria

Assuming all account and portfolio requirements were met (or any discrepancy satisfactorily explained in the paper), and assuming the required tables and graph are present and complete, I plan to use the following as a rough guideline when I grade the paper:

Required Stocktrak trades were completed on time varies*

Correct results, tables and graph 40%

Written discussion 40%**

Overall professionalism of paper 10%

Investment performance 0%

* In past semesters most students have completed all or nearly all required trades on time or nearly on time. Missing one trade by a few days won’t have significant score consequences; serious neglect of the requirements would make more of a difference.

** Content is 20% and 20% is writing. Use the Communications Center if you need help writing. I won’t correct your English, grammar, etc. You will simply lose 20%.

 

 

 

Historical Portfolio Values

Date

Value

#Trades

Rank

08-28-2012

$1,000,411.03

0

0

08-29-2012

$1,000,493.26

0

0

08-30-2012

$1,000,575.49

0

0

08-31-2012

$1,000,657.73

0

0

09-01-2012

$1,000,739.98

0

0

09-02-2012

$1,000,822.23

0

0

09-03-2012

$1,000,904.49

0

0

09-04-2012

$1,000,986.76

0

0

09-05-2012

$1,001,084.53

1

16

09-06-2012

$1,001,300.92

1

22

09-07-2012

$1,001,392.82

1

23

09-08-2012

$1,001,392.82

1

23

09-09-2012

$1,001,392.82

1

23

09-10-2012

$1,001,365.56

1

26

09-11-2012

$1,001,475.49

1

24

09-12-2012

$1,001,510.42

1

25

09-13-2012

$1,001,684.86

1

31

09-14-2012

$1,001,721.31

1

28

09-15-2012

$1,001,721.31

1

28

09-16-2012

$1,001,721.31

1

28

09-17-2012

$1,001,761.69

1

30

09-18-2012

$1,001,922.66

1

29

09-19-2012

$1,001,921.64

1

29

09-20-2012

$1,001,995.63

1

29

09-21-2012

$1,002,095.12

1

29

09-22-2012

$1,002,176.62

1

24

09-23-2012

$1,002,176.62

1

24

09-24-2012

$1,002,348.64

1

25

09-25-2012

$1,002,332.66

1

26

09-26-2012

$1,002,544.69

1

20

09-27-2012

$1,002,603.72

1

24

09-28-2012

$1,002,609.51

1

24

09-29-2012

$1,002,609.51

1

24

09-30-2012

$1,002,609.51

1

24

10-01-2012

$1,002,916.42

1

23

10-02-2012

$1,002,925.99

1

24

10-03-2012

$1,003,057.07

1

25

10-04-2012

$1,003,150.65

1

26

10-05-2012

$1,003,374.74

1

24

10-06-2012

$1,003,374.74

1

24

10-07-2012

$1,003,374.74

1

24

10-08-2012

$1,003,571.55

1

19

10-09-2012

$1,003,663.67

1

17

10-10-2012

$1,003,700.29

1

16

10-11-2012

$1,003,855.42

1

19

10-12-2012

$1,004,090.06

1

17

10-13-2012

$1,004,090.06

1

17

10-14-2012

$1,004,090.06

1

17

10-15-2012

$1,004,395.01

1

15

10-16-2012

$1,004,661.17

1

14

10-17-2012

$1,004,765.34

1

13

10-18-2012

$1,004,941.52

1

10

10-19-2012

$1,004,985.70

1

8

10-20-2012

$1,004,985.70

1

8

10-21-2012

$1,004,985.70

1

8

10-22-2012

$1,005,184.29

1

9

10-23-2012

$1,005,134.00

1

7

10-24-2012

$1,005,199.22

1

6

10-25-2012

$1,005,105.44

1

9

10-26-2012

$1,005,122.67

1

9

10-27-2012

$1,005,122.67

1

9

10-28-2012

$1,005,122.67

1

9

10-29-2012

$1,004,367.90

2

9

10-30-2012

$1,004,251.62

3

12

10-31-2012

$1,013,322.02

17

6

11-01-2012

$1,020,740.47

17

6

11-02-2012

$1,021,486.92

17

5

11-03-2012

$1,021,486.92

17

5

11-04-2012

$1,021,486.92

17

5

11-05-2012

$1,023,286.01

17

4

11-06-2012

$1,018,590.77

17

7

11-07-2012

$1,018,458.99

17

5

11-08-2012

$1,015,421.79

17

5

11-09-2012

$1,011,593.31

17

5

11-10-2012

$1,011,593.31

17

5

11-11-2012

$1,011,593.31

17

5

11-12-2012

$1,016,500.89

18

5

11-13-2012

$1,011,953.24

18

4

11-14-2012

$1,008,408.58

18

3

11-15-2012

$996,940.11

18

10

11-16-2012

$998,262.74

18

10

11-17-2012

$998,262.74

18

10

11-18-2012

$998,262.74

18

10

11-19-2012

$1,005,618.53

18

6

11-20-2012

$1,004,977.74

18

6

11-21-2012

$1,001,441.38

18

14

11-22-2012

$1,003,723.20

18

9

11-23-2012

$1,005,082.36

18

12

11-24-2012

$1,005,082.36

18

12

11-25-2012

$1,005,082.36

18

12

11-26-2012

$1,014,385.62

18

5

11-27-2012

$1,009,785.54

18

5

 

1 As a general rule, I do not permit teams of more than two, but if three students in this section want to share an account and manage a portfolio together, you can request an exception. To request the exception, each member of the proposed team of three must e-mail me separately from their respective email accounts by September 4, 2012. State the request, explain why you think this team would be both practical and effective, and discuss your own personal motivation for working with two other people instead of alone or with one other student. I’ll be happy to discuss this with you in person but I will not consider the exception without the e-mails, and there is no guarantee I will grant the exception.

 

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