Portfolio Management Simulation Project
Texas Wesleyan University, Fall 2021
You can use the following link to register for this tournament:
https://www.stocktrak.com:443/members/register?session=FIN3325InvestmentsFA2021 to activate your account. The fee for the service is $31.95. You can get a free stocktrak account from the coupon in the new textbook.
In this project you are assumed to act as a small hedge fund manager to maximize the portfolio’s rate of return in terms of the level of risks accepted over the 9-week simulation period. Due to the fact that hedge fund managers are commonly structured as private partnerships, and thus subject to only minimal SEC regulation, you can pursue various trading strategies and employ high leverage, heavy use of derivatives, and short sales, that are unavailable to the mutual fund manager. You are asked to design and execute an appropriate strategy to maximize the portfolio’s return. You are responsible for explicitly stating your primary investment objectives, formulating an appropriate investment strategy to meet the objectives, conducting the necessary research, selecting the appropriate securities, executing trades, tracking daily performance, and rebalancing the portfolio when necessary.
If you are not familiar with hedge funds, please refer to the following online video
https://www.youtube.com/watch?v=xmKDGFT3j8w
Required:
Each student has $1,000,000 and 200 trades to work with. And each of you must establish a minimum of 30 trades. The project will start on September 13, 2021, and end on November 13, 2021 (9 weeks total). Therefore, each student must make sure that s/he opens an account before September 13, 2021. You are also required not to hold more than 25% of your portfolio in one security.
Given to maximize the rate of return over the simulation period, each student must develop his/her asset allocation strategy, and select the appropriate benchmarks. A proxy for an appropriate benchmark can be found from a variety of ETFs, you can easily find ETFs’ information from yahoo.finance.com/etf. Understanding your benchmark can lead to views on sector underweight/overweight, and stock selection. You are required to invest in mutual funds, bonds, stocks, options, and futures contracts. Currency and commodities are optional, but encouraged. You should use all types of order to execute your strategies.
At the beginning you must justify your investment objectives and asset allocation strategies. You must hand in this part on September 27, 2021. The investment objective and asset allocation report must include
- Discuss investment objectives, asset allocation strategies, planned trading strategies, choice of benchmark index which you try to beat.
- Provide a matrix of the various positions that are expected during the semester. This matrix will include the various asset categories, names of some specific investments within each category, as well as a range, in dollar values, placed in each category (total $1,000,000).
- You should also discuss the risk level (beta) by establishing an appropriate range to target over the 9-week period.
During the process of simulation, you must keep a record of the rationale for each trade decision that you make during the simulation, and collect articles that discuss the securities that you trade and provide relevant economic advice important to your portfolios success. You are also required to track the daily performance of your portfolio and your benchmark index (keep a log of the total value of your portfolio). If you want to change your strategy, you must justify your decisions.
Each student will make a brief presentation of his/her full report and submit the report, excel sheet for the data analysis and presentation on December 10, 2021. The presentation accounts for 30% of the project grade and the report and excel analysis accounts for 70% of the project grade. There will be an opportunity for your peers to question your investment process. The final report and presentation will be graded based on the following questions
- You must well define your investment objectives, asset allocation strategies, and appropriate design and justify your execution of the trading strategies (including any adjustments during the semester) in order to achieve your investment goals.
- Under the current economic situation, how would you allocate funds to bonds, equities, currencies, and/or commodities, and domestic large cap equity, domestic small cap equities, international developed and emerging markets equities?
- Will emerging markets stocks exhibit more correlation with developed stock markets this year?
- What is your view on the Dollar and Euro? What is your view on inflation? Are there any plays to be made in interest rate futures?
- You must be as specific as possible. You must specify your investment style: technical or fundamental or mixed. You must be specific in terms of your selections and the percentage of funds employed in each area and attempt to make selections that are appropriate given the current economic climate. More specifically, you should be able to follow the trading rules (number of trades, types of positions (long and short), types of trades (limit and stop), diversification and asset allocation, choice of benchmark, use of cash, tracking your performance, as well as articles collected and depth of investment research activity).
- You must include a return analysis based on the holding period return over the 9-week period. When you consider the fee structure of your hedge fund. You must decide your own fee structure, with management fees of between 1-2% and incentive fees of between 5 and 20%. You must compute average weekly return on your portfolio and your benchmark, compare your fund’s performance with that of the benchmark you select. What are your 5 best performing and 5 worst performing investments in your portfolio in terms of their rate of return? What are the firm-, industry- or market-related events that led to the extreme performance of these six stocks?
- You are also required to include a risk analysis. You must compute the standard deviation of your portfolio’s and your benchmark’s weekly returns, as well as your portfolio’s beta (using your benchmark index as “the market”). On a risk-adjusted basis, did you beat your benchmark? You must evaluate your performance based on the Sharpe ratio, Treynor measure and others mentioned in the class. Which of these measures is most appropriate for evaluating your performance? (Think about what the R2 of your portfolio beta regression tells you about this last question.) You are required to compute your up-market and down-market betas. Were you good market timers or bad market timers? (If I did not discuss it in the class, please figure it out by yourself)
- You must describe your trading experience: what worked, what didn’t, and what you learned. If you had to do it all over again, would you change our investment objectives and selection strategy in any way? If not, why? If yes, how?
- If you can beat your benchmark, which must be appropriate, on a risk-adjusted basis, you will earn 2 bonus points of the final grade.
- In an appendix you must provide a “timeline” or chronicle of each of your trading decision, and the thought process behind each trade.
Where you can find information on securities:
The main source we are going to use is the Wall Street Journal, www.wsj.com. However, feel free to search for information from other sources, such as:
1) For stocks: Value line, S&P stock report, MSN money, Finance Yahoo!, Bloomberg, www.bigcharts.com, http://www.hoovers.com/free/
2) For bonds: www.bondsonline.com
3) For options: www.cboe.com, go to markets. You can get delayed quotes there.
4) For mutual funds: www.morningstar.com
5) For macro economic analysis: BusinessWeek, Economist
6) The publisher website, www.mhhe.com/edumarketinsight
7) For futures: www.cmegroup.com
etc.
General Remarks: I do not expect anyone to be an expert hedge fund manager. This is an exercise in learning. I do expect to see evidence of solid effort. This includes taking initiative in finding information and making a sincere effort to apply the concepts and methods that are being covered in the course.
FIN 3325 Investment
Portfolio Management Simulation Project Evaluation Rubric for Student________________________________
| Outcomes | Exemplary (.9-1) | Proficiency(.7-.8) | Adequate(.5-.6) | Inadequate(<.5) |
| Clearly outline the structure of the paper (5%) | | | | |
| Conclusions are clearly stated in the executive Summary (10%) | | | | |
| Introduction: clearly stated the research question in the project (5%) | | | | |
| Clearly discuss Investment Objective and Strategies (10%) | | | | |
| Clearly state the investment styles used in the simulation (10%) | | | | |
| Return analysis is accurate and thorough (20%) | | | | |
| Risk analysis is accurate and complete (20%) | | | | |
| Reflection on this investment experience is critical (10%) | | | | |
| Conclusions are made clearly (5%) | | | | |
| The paper is free of gramma issues and other errors (5%) | | | | |
| Total (100%) | |
