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Investments – Diversification Project

You have $1,000,000 in your brokerage account and need to invest at least $100,000 in each of the following asset classes: (1) equities, (2) mutual funds including ETFs, (3) bonds, (4) options, and (5) futures.

For this assignment I suggest 1) relax and enjoy this experience, 2) read the instructions and learn the portfolio limits carefully, 3) put in some time to read news stories, analysis reports, and rumors. Have fun with this trading game during this forced swim through the financial markets. Choose some investments with extravagance and uniqueness. Those are truly dynamic characteristics.

How to get started before Jan 29th:

  • Register an account
  • You can start trading on Jan. 29th and complete your first portfolio by Jan. 31st.
  • After forming your first portfolio, submit your portfolio “policy statement” clearly stating following issues:
    • Investment Objectives
    • Your portfolio style (asset classes and allocation)
    • Discuss major different risks that your portfolio faces
    • According to your investment style, name three benchmark portfolios (mutual funds, indices, etc.)
    • Due Jan 31st in class

Be the best group of portfolio managers: (Feb 1st – Apr. 9th)

  • Stick to your “policy statement”. If you make any major changes during the trading period, you need to specify and explain the changes in your final report.
  • This is YOUR portfolio and its performance shows your knowledge and skills. Although there are certain limits on asset classes and asset allocation (e.g.: you can invest up to 60% of your capital in stock, bond, or mutual funds).
  • You need to actively manage your portfolio. I have full access to your trade records and expect to see at least one trade in each asset class every week. 2

On Apr. 9th:

  • Sell all investments before markets close.
  • Start preparing your final investment portfolio report, which is due on Apr. 21st in the OnCourse DropBox. Your report should have a cover page clearly stating all member names, course title, and date.
  • Your project will be graded based upon:
    • Policy statement (20%)
    • Trading activities (10%)
    • Portfolio performance (40%)
      • First place – 40%
      • 2nd and 3rd – 25 to 35%
      • Last place – 10% or lower
    • Final report (30%)

Game rules:

RULE 1:

Invest in at least 4 different asset classes at startup. Buy extra securities if you want.

RULE 2:

Our lab has 4 machines that have on-line links to the Bloomberg Information network. You are required to obtain information from Bloomberg about one stock and bond in your portfolio. Failure to ever submit the printouts subtracts 25% points from those already earned. See tg-bloomberg.pdf for instructions on using the machines and collecting the Bloomberg printouts.

What you need for the final submission on the due date:

(1) Common Stock – Use a stock screen to choose a common stock. A stock screen allows you to set different criteria and then finds all stocks with information that satisfy the criteria. The free stock screen described below may be useful after you leave IUSB. Point your browser to http://screen.yahoo.com/stocks.html. Set a MINIMUM OF 4 CRITERIA and arrive at a good-looking final sample with not more than a dozen companies. Make these printouts:

  • PRINTOUT 1: Print the web page with the Stock Screener Search Results.
  • PRINTOUT 2: Return to the criteria page (click “Back”) and print the criteria settings.

Return to the search results. Choose any one stock for your start-up stock. Jot down and record in your spreadsheet the ticker symbol from the leftmost column so that you can easily find the price later. Once you have chosen the stock click “Chart” in the rightmost column labeled “More info.” On the subsequent page along the left frame under “Charts” click “Technical Analysis.” For the table entry “Moving average” click on 10 and click on 100.

  • PRINTOUT 3: Print the chart showing the 10-day and 100-day moving average. Make your own call and write in big letters at the top of this page “BUY” or “SELL” by employing moving average trading rule.

(2) Mutual Fund – There are over 5,000 mutual funds in the USA so finding a winner can be difficult especially over a short horizon. Here are instructions for a free Internet mutual fund screener. Point your browser to http://www.morningstar.com. You might be asked to join for a free membership — no problem it’s free. Along the top frame are selections such as “Home”, “Portfolio”, etc. Click on “Tools.” Click the “Basic Screener” for “Mutual Funds”. At the top of the Mutual Fund Screener frame, you may click, if you wish, on the “Instructions”. This link describes operation of the Basic Mutual Fund Screener. With any Mutual Fund Screener, you set different criteria in order to find the mutual fund that fits your preferences.

To read the definition of any criterion, click on the little light bulb besides the criterion heading. Read the description, look at the choices to which the criterion may be set, and then set it. When finished setting criteria, click the tab “Show Results.” If you get zero matches, or otherwise want to change something, click “Change Criteria.” Go back and forth between Show Results and SET A MINIMUM OF 4 CRITERIA to get a good-looking final sample with not more than 24 Search Results.

  • PRINTOUT 4: Print the web page with the Search Results and criteria settings. Click on the fund name to get a Snapshot of information about the particular mutual fund.
  • PRINTOUT 5: Print the web page showing the Snapshot of the fund. Jot down the ticker symbol that appears to the right of the fund name and type it into your spreadsheet. With the ticker symbol, you can easily find the fund’s price later.

(3) Corporate bond – Point to http://cxa.marketwatch.com/finra/MarketData. Thousands of businesses in the financial services industry allocate millions of dollars to make this site available. Currently your view is the “Investor Information” tab and “Market Data” selection. The tools, calculators, and other tabs show information that someday may be worth browsing. For now, however, click along the left frame on “Bonds” > toward the middle of the page click “Advanced Bond Search” > click “Corporate” for the bond type. Definitely search for a bond that (a) matures two years or more beyond the end of this semester, (b) coupon type = fixed, (c) trading activity within the last 10 days, and (d) interest payments = Semiannual. You may, if you wish enter any of these optional settings: an issuer name (e.g. Indiana), coupon rate (e.g. 5.0 to 8.0), rating (e.g. AAA to BBB), or industry group (e.g. Energy). Refine the search criteria as needed. Click on the bond you select under the column “Issuer Name”.

  • PRINTOUT 6: Get the printer friendly version of the Bond detail for your selected bond 4

Notice that Marketwatch/Finra and Bloomberg quote bond prices per $100; e.g., 98.63 means a bond price of $986.30 and to spend $100,000 you must buy 102 bonds. In your spreadsheet enter, for example, 986.30. Take a copy of this printout to the lab later to assist finding this bond on Bloomberg.

(4) Investment portfolio report – Prepare your report following the guidelines below. Your report should be a non-sensitive, impersonal business report befitting a literate graduate from a business school. Mechanical errors, such as spelling mistakes or disagreement between subject and verb tenses, detract from the reader’s impression of quality. A high-impact report incorporates headers, itemization, short paragraphs, and smart sentences. Edit three times before submission so that it reads better. Present discussions in paragraph form with itemized headings for each discussion. There are no length requirements or restrictions. About 80% of all reports are between 3 and 5 pages. Disinformation detracts from scoring. Do not send extraneous printouts.

  1. Market backdrop (40% of final report)
    • 1a. Summarize and reference one financial author who explains why market prices moved during a specific horizon, such as the TG holding period, the previous month or weeks, or other explicit period. Use your words and paraphrase his/her argument.
    • 1b. Does she/he have a dominant argument for explaining the price movement or are other trade-offs plausible.
  2. Portfolio performance, highlights, and analysis (60%)
    • 2a. Review your policy statement and changes
    • 2b. Discuss your portfolio gains, losses, and trading activity. Confirm whether the securities you sold on any adjustment date outperformed the ones replacing them. • 2c. How much economic profit (%) did the start-up common stock create or destroy for a well-diversified portfolio? Compute ROR equilibrium using (i) alpha and (ii) beta from your Bloomberg printout.
    • 2c. Discuss following items.
      • 2ci. What is next year’s interest rate at which the one year rate of return from owning your start-up bond would be zero? Obtain your answer from the Bloomberg ”Horizon Analysis”. Qualitatively compare the current yield with capital gains yield for that scenario.
      • 2cii. Was there any foreign currency whose exchange rate moved so much during the game that you would have gained more had you used dollars to simply buy and hold the foreign currency fund until game’s end? That is, would avoidance of USD denominated securities have been better?

(5) Bloomberg printouts. You don’t need to print out your final portfolio standings. I can see them on Stock-Trak.

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