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Finance – Create A Mutual Fund

Congratulations! You have just been hired to create a new mutual fund. The objective of this mutual fund is to outperform the S&P 500. This is an aggressive mutual fund that requires an active management strategy. As the founder of this mutual fund you must select an investment strategy that you expect to outperform the S&P 500. The investors in this mutual fund believe that portfolio managers must earn their high salaries thus they require active trading. This means that you must perform a minimum of 50 trades. However, the investors are also afraid that some managers may churn the fund, so you cannot make more than 200 trades. The mutual fund has an initial balance of $1,000,000 and margin is available. As manager of the mutual fund, you can buy or short stocks, bonds, options or futures. The mutual fund will be created on January 18and the funds will automatically be liquidated on April 9 so you only have a few weeks to earn your millions. Your final grade will be based on the quality of your analysis, not on your total return.

However, since most portfolio managers are compensated based on their performance, I am offering the following compensation arrangement. If you accept this arrangement then you are entitled to the following bonus points

– First Place 15 Points added to part II of project
– Out-perform the S&P 500 6 Points added to part II of project
– Under-perform the S&P 500 3 Points deducted from part II of project

The above points will be either added (or deducted) to the written portion of part II of the project. The bonus points will be awarded based on your ranking at the end of the game.

Part I of Portfolio Project

Your first step is to consider all of the potential trading strategies that may lead to large returns. For example, the dogs of the Dow, a contrarian strategy, a momentum strategy, a short sales strategy, a low p/e ratio strategy, a low book value strategy, a value line strategy, fundamental analysis, internet strategy, technology strategy, long or short straddles. You can select multiple strategies for your mutual fund. This is your opportunity to test the efficiency of the stock market. Consider all of the highly touted investment strategies and select the one that you believe will lead to the highest return. You must submit a one-page summary of your strategy and I must approve each strategy.

After you select your strategy you can prepare for your oral presentation. Your group has a maximum of ten minutes for your oral presentation. The presentation should cover the following information:
– Outline your strategy and justify why you selected it.
– Provide historical evidence of the performance of your strategy.
– Provide evidence showing that mutual funds or portfolio managers use this strategy. Include the prospectus of the mutual fund.
– Write a detailed trading procedure explaining how you will implement your strategy.
– You must perform the following transaction:
– Buy a minimum of one call option and one put option
– Write a minimum of one call option and one put option
– Buy a futures contract
– Short a futures contract
– Buy a stock
– Short a stock
– The presentation should convince investors that they should hire you to manage their money.
– Write an investment policy statement for the type of investor who should invest in your mutual fund.

Part II of the Portfolio Project

Part II of the portfolio project should contain the following:
– Evaluate your strategy and your ability to effectively implement this strategy.
– Relate your strategy to the efficient market hypothesis.
– Calculate the Holding Period Return, Simple Yield, and Compound Yield for each position and the entire portfolio.
– Create a spreadsheet listing the name of the company, the company symbol, number of shares owned, purchase price, current price, dollar gain or loss.
– Select a core group of stocks (3 – 5) and provide fundamental data concerning each stock.
– Use the constant growth model and at least one other valuation model to value your core group of stocks.
– Apply the CAPM to your core group of stocks. Did your core group generate an abnormal return? Did your portfolio generate an abnormal return?
– Use the Sharpe performance measure to evaluate your performance.
– Create at least three graphs
– Plotting the total market value of your portfolio over time.
– Plotting the market value of a key stock in your portfolio over time. Discuss any dramatic changes in the market value due to new information.
– Compare your compound return to the return on the S&P 500, the Dow, and the NASDAQ over the same time period. Did you outperform these averages? Discuss why these are or are not good measures of your performance.
– Evaluate your performance on the project. Apply concepts we learned in class to your portfolio. What did you learn? What would you do differently?

How do you get started?

You need to register your group by the next class.
Peer Evaluation
At the end of the semester, you will confidentially grade your fellow group members. Their grades should be based on the following criteria:
– Did they do their share of the work throughout the semester?
– Did the group member attend all group meetings?
– Was the member prepared?
– Did they share in the presentation responsibilities?

You will give two grades to each member of the group, including yourself.
Group Member Letter Grade Points
Larry A 50
Moe B 30
Curly C 20
Total B 100

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