Portfolio Management Project

Part One (Portfolio Management):

Each student will run two $500,000 portfolios (described below.) Trading will begin on Monday, Jan. 25th and end on Friday, April 9th (11-week trading period.) Each portfolio must be “active” no later than Friday, February 5th. In order to be considered active, a minimum of 6 transactions in the trading portfolio and 10 transactions in the mutual fund portfolio must be completed.

Trading Account:

One portfolio will be an active “trading” account. The goal of the first portfolio will be to accumulate the most wealth. Each person starts with 200 transactions. In your trading account you must establish a minimum of 3 options positions, 3 futures positions, 1 short sale (of a stock), and a minimum of 40 total transactions (note – no more than 1 futures position or option position can be established in the last week and count towards your minimum of 3.) You must have at least five weeks with at least 3 transactions for the week. You may trade stocks, options, futures, bonds, mutual funds, international stocks. A maximum of 25% of your equity can be placed in any one position. Only stocks with a price of $3.00 or higher can be traded. There is a flat commission of $10 per transaction

Mutual Fund Account:

The second portfolio is limited to 20 transactions and will be primarily buy-and-hold. For this portfolio, you must manage it with a specific objective in mind (similar to a mutual fund – an “approved” list of objectives is listed below). Your grade will be partially determined by how well your portfolio “fits” your objective. Please note that this is NOT a portfolio of mutual funds, but a portfolio of individual securities (stocks and/or bonds) managed to meet a specific objective. DO NOT PUT MUTUAL FUNDS IN YOUR MUTUAL FUND. Since you only have 20 trades in this account, be careful to make sure you know what you want to do before you start trading (and that you are using the correct account).

Approved Mutual Fund Objectives: Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund, Large-Cap Value Fund, Equity Income Fund, Balanced Fund, International Equity Fund, Bear Fund, Long/Short Hedge Fund (check with me if you are using this to make sure you understand the objective).
Point Allocation (Trading Account Only) –
$700,001 or more 12 points
$575,001 – $700,000 10 points
$525,001 – $575,000 8 points
$425,001 – $525,000 6 points
$375,001 – $425,000 4 points
$250,001 – $375,000 2 points
$250,000 or less 0 points

Extra Credit Points (Trading Account Only) –
2 Highest portfolio value (each week – starting on Feb 12th) 2 points
2 Largest dollar change (each week – starting on Feb 12th) 2 points
The top 5 Portfolios Values (as of close on April 9th) 10 points
Higher portfolio value than the professor (as of close on April 9th) 5 points
(Max Extra Credit Points during project of 20 per person)

Failure to meet the minimum trading requirements will result in up to a 25-point penalty on the project and be ineligible for extra credit points. Accounts that are not “active” by the close on Friday, Feb. 5th will be penalized 5 points per trading day until they have reached the minimum number of transactions (maximum 25 points).

Part Two (Mutual Fund Objectives and Strategy):

Each student will prepare a statement of his or her mutual fund objective (from the above list) and strategy for meeting that objective. The strategy should include a general statement of what characteristics you are looking for in the securities that you select and why you feel these characteristics are important. For each of the securities you purchase in the first two weeks, you should discuss why that security was selected for this portfolio. Attention should be paid to meeting your objective and (except for the long/short hedge fund) achieving adequate diversification. Finally, a summary table should include key details of each stock in the portfolio (company name, industry, ticker symbol, market capitalization, purchase price, shares purchased, and portfolio allocation, and any additional information you feel that a potential investor would like to be able to see at a glance.) This paper will be due Thursday, February 18th and will be worth 50 points.

Part Three (Summary Analysis):

The summary report will summarize your investment experience from the Stock-Trak simulation. The summary report will be based on your actively-managed account and should include

  • A discussion of your strategy (why did you choose that strategy, what are strengths/weaknesses of the strategy, etc.) during the Stock-Trak simulation and how you implemented that strategy. If your strategy changed over the course of the contest or you used multiple strategies, discuss why (Note – buying random stocks is not a strategy).
  • A recap of 6-8 specific transactions in detail. You should discuss the specifics of why you made the transaction (how it fit your strategy, valuation, specific news, etc.). In this recap, you should focus on at least one transaction from each of the following categories: long stock, short stock, option, and futures. In addition, you should discuss your best trade and worst trade during the simulation. Note that the best/worst trades are not necessarily the ones that produced the biggest gain/loss…don’t be results-oriented.
  • A recap of your performance. o discuss 3-5 key factors (a specific news event impacting one or more of your stocks, general market action, etc) that had significant impact on your portfolio’s performance during the trading period.
    • calculate the risk-adjusted performance using the DJIA and one other market index that you feel is the best benchmark for your portfolio. You should calculate the Sharpe and Treynor Measures along with Jensen’s Alpha based on your daily returns (you may ignore the risk-free rate if you wish).d
    • discuss both your risk level in terms of standard deviation and beta along with your risk-adjusted performance.
  • This paper will be worth 90 points and will be due on Tuesday, April 22nd.

Miscellaneous comments:

Every component of this project is expected to be done in a professional manner and will be graded under those expectations. This means that grammar, spelling, and overall presentation will have an influence on the score. Note that these items are not a substitute for quality content, but a compliment to it. While luck will definitely play a part in the performance of your portfolio, it will play a very small part in your grade for this project.