Stock-Trak Project

Project Objective: The objective of this project is for students to learn about market instruments and security market trading mechanism; gain firsthand experience on security analysis, trading and portfolio performance evaluation; understand market volatility and the major factors that drive security prices; research frequently on the Wall Street Journal, financial databases and various finance websites; and develop team working experience and critical thinking skills. The goal is to beat a passive $1,000,000 benchmark portfolio comprised of 50% U.S. equities (an "index fund"), 40% long term government bonds, and 10% cash (short term money market instruments). 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. Characteristics of the Stock-Trak Program: Trading Website: http://www.stocktrak.com Trading Period: 10 weeks, Monday, Sep. 23 through Friday, Nov. 29. Trading Time: weekday 8:30am-3pm central time. Trade made after 3pm will be processed the next business day. Registration: To register your account, go to http://www.stocktrak.com/public/members/registrationstudents.aspx?p=GAC-EM371-Fall13 Summary of the Trading Rules: Each team begins the simulation with $1,000,000 in cash and may borrow additional funds. How much you may borrow is dependent upon the equity in your account. You can buy, sell, trade on margin, and sell short all actively traded NYSE, AMEX, NASDAQ, TSX, NYSE Arca, and OTCBB stocks (common and preferred) that are priced at $5.00 or more. StockTrak also trades a variety of U.S. Treasury Bonds and Corporate Bonds. A complete list of the bonds traded is available at the Bond Trading Pit on the web page. Each bond has a par value of $1,000. When making trades, you must know the ticker symbol of the securities to be traded. Stock ticker symbols can be found on Stock-Trak under the symbol look-up link. When trading mutual funds, the web page is the only source for tickers. A brokerage commission is applied to all transactions. The commission is a flat rate of $10 per trade. Bond buyers will also be charged for accrued interest since the last coupon payment. Bond sellers will receive accrued interest since the last coupon payment. Day trading is not allowed, and a maximum of 25% of account value is allowed for trading on one position. For trading on margin, you must maintain a total equity position that is greater than or equal to 30% of the current value of your current holdings. If you don't you will receive a margin call. Margin Requirement: The margin requirement for stock purchases and short sales is 50%, which means that for stock purchases you can borrow up to 50% of the total cost. For short sales, you must deposit an amount equal to 50% of the current market value of your short positions. Starting with $1,000,000, you may borrow an additional $100,000, making your total buying power up to $200,000. End of Day Game transactions are priced at market daily closing prices. Bond prices are available only on the Stock-Trak website. All Mutual Fund transactions are treated as real time transactions and priced at the previous day's closing price. Treasury Bonds must be bought and sold in $100 increments only.

 Interest will be earned on all available cash balances and credited at the close of each day. Interest will be calculated using a money market rate, currently 3%. Interest will be charged at a rate of 8%. Investment Team and Required Work: Read the trading rules carefully; join into a group of 3 students as an investment team; discuss your desired investment strategies with your teammates and choose a team name to reflect your strategy During the trading period each team is required to: (1) engage in at least one buy or sell transaction per week; a passive strategy is not acceptable; (2) keep a record of the rationale for each trade decision that you made during the simulation; (3) follow news and development of your holding securities; (4) track the weekly performance of your portfolio and the benchmark portfolio. Performance Reports & Grading Procedure: Investment Team Statement: On Sep. 20, each investment team needs to hand in a one-page typed statement identifying the followings: The names of the team members and your team; Investment Objective: Your team should specify the goal of your team portfolio, which would be reflected in the types of securities chosen, based on your expectation of the markets and economy during the trading period. For example, you may have a goal of income with preservation of capital if you are pessimistic about the economy or long-term capital appreciation if you are optimistic. Investment Strategy: You should detail the strategy of your portfolio as how you will allocate your fund into stock, bond, mutual fund, and cash. Also specify the sectors that you will be most likely to invest. In addition, you should specify if you anticipate purchasing stocks on margin. . Expected risk: Explain what the possible risks are associated with investing in your portfolio. Project Report: On Dec. 6, each team will prepare and turn in a final performance report that (1) tracks the week-to-week performance of the portfolio; (2) analyzes the macroeconomic, financial market and stock-specific news events that may have affected the risk and return performance of their portfolios, and (3) evaluates statistically their relative and absolute performance using various tools and techniques. The report should be approximately 5-6 pages typed and double-spaced, using one inch margins and a font size of 11. Additional graphs and tables may be included and are not counted in the number of pages. Do not include graphs or tables that you do not specifically discuss in the report. Among other things, report should contain: 1. For each security, o price level and change (performance) o a measure of historical return. I suggest 5 years. o 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/ o the betas of each security 2. For the whole portfolio, your goal is risk analysis and performance analysis:

o 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 can also obtain sector performance results from the various sector indexes at bigcharts.com. o Find the portfolio beta. o Find the portfolio expected return, using the T-bill rate as the risk-free rate and 12% as the market return. o Measure the portfolio's excess return: the difference between the actual and the expected. o Measure performance relative to the benchmark portfolio. o Use the Sharpe, Jensen, and Treynor measures. You'll need the beta, average return and standard deviation of your portfolio and of the benchmark. o Conduct a performance attribution analysis (see relevant chapter in textbook). a) contribution of asset allocation to performance b) contribution of stock selection and bond selection to performance Also, be sure that your write-up includes an introduction and conclusion as described below. A. Introduction (15%) The introduction should clearly define your initial investment objectives and the trading strategies (including modifications during the semester) necessary to reach your investment goals. Are they different from that stated in your initial investment statement? Some questions to consider include: o Do you feel the selections you made and the investment strategies you took were appropriate given the investment objectives and target risk/return goals that you selected? o What specific steps did you take during the trading period to attempt to adjust your portfolio to better achieve your target? How successful were these steps? o Did you learn anything about short-term trading? Market timing? Trading on news? Economic indicators? B. Overall Performance (15%) You should begin by discussing the overall return and risk characteristics of your portfolio. Most importantly, what are the total holding period return and total risk of your portfolio and how do they compare to that of the market and that of your benchmark? How well are you able to follow the trading rules (diversification and asset allocation)? How well did your investment strategy work? How does the return performance of your portfolio relative to the benchmark portfolio? Provide an analysis of the 3 best performing and 3 worst performing investments in your portfolio. C. Market, Industry, and Security-Specific Events (20%) Next you should discuss the five most important individual-security positions that explain the performance of your portfolio. What economic, industry, or security-specific events explain the return on these securities and were these events consistent with your expectations when taking the position? Be sure you are specific about how these events impacted your portfolio performance. Note that you do not have space in the report to discuss every event that took place. Instead, you should focus on those that are the most important and had the greatest impact on your portfolio performance. If you have room, you could also discuss the risk and return characteristics of the best and worst securities in your portfolio, how your securities performed relative to their industries, and whether your portfolio was diversified or dominated by any particular securities. D. Risk-Adjusted Performance (25%) This is the most important part of the project and will likely represent the largest section in your report. In this section, you should use what you learned in class to analyze the risk-adjusted performance of your portfolio. Use the portfolio performance measures discussed in class to assess your performance relative

to the market and relative to the benchmark index. This is the most important part of the project since it involves risk-adjusted performance measures that are used throughout the finance industry. Your discussion should include calculations of the various performance measures, as well as complete explanations and interpretations of the results from each measure. Note: At a minimum, you must calculate and discuss the Sharpe, Jensen, and Treynor measures for your portfolio, for the market, and for the benchmark index, and the measures of your portfolio relative to the market and relative to the benchmark. Which performance measure or measures are most appropriate to judge the performance of your investment management group? Why? E. Market Timing and Security Selection (15%) Use one of the market-timing models we discussed in class to evaluate the market timing and security selection skills of your portfolio management team. Discuss and interpret the results. Did your group demonstrate any market timing skills? Did your group demonstrate security selection skills? F. Conclusion (10%) What are your conclusions based on the evaluation you have done for this assignment? What have you learned through the class and from your portfolio simulation experience? If you could start the investment simulation over from the beginning, would you do anything differently? If you had to do it all over again, would you change your investment objectives and strategy in any way? Grading Your grade on the Stock-Trak project will mainly be based on the soundness of your analysis and consistency of your trades throughout the trading period with the strategy that you specified at the beginning of the game. In addition, 1st,2nd, and 3rd groups (of both sections of the class) that are ranked highest based on their risk adjusted performance, Sharpe Ratio as calculated by Stock-Trak, on this game, will get an additional 10, 7, and 5 points on their report. In contrast, groups whose risk adjusted performance is 20% lower than the benchmark portfolio will receive 10 points deduction on their report. Group Member Evaluation Since this is a group project, each of the members in an investment team will be required to evaluate the contribution of your teammates to the success of your group. This evaluation will be done during the final week. The grades should be based on the following criteria: o Did they do their share of the work throughout the semester? o Did the group member attend all group meetings? o Was the member prepared? o Did the group member put up effort into the project? o Did they share in the presentation responsibilities? You will give two grades to each member of the group, including yourself. Members who receive an average point less than 30 but more than 20 will receive a 10% deduction and an average point less than 20 will receive a 20% deduction on the grades of the group assignments, project, and presentation. The deducted points will be transferred to the group member receiving the highest average point. Group Member 1 Letter Grade A B C B Points 50 30 20 100

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