FIN 651 WEB Fall 2012 Stock Assignment The primary purpose of this project is to give you the

opportunity to trade securities and the responsibility of managing a portfolio without placing any of your own money at risk. Form teams of 3 to 4 students. Your group will need to create two portfolios, each with a different objective. The first portfolio is a buy-and-hold portfolio that you will not trade, just monitor during the semester. The second portfolio is an actively managed portfolio for which you will need a Stock|Trak account. Below is a brief description of each portfolio and the assignments related to them. Each team member will need to hand in an evaluation of other team members. Team members score for the assignment will be adjusted based on their fellow team members assessment of their effort contributed. Part 1 Initial portfolio selections (10% of your final grade) Due: October 8th, Monday (9 am eastern time) Buy-and-hold portfolio Lets suppose that you have $1,000,000. You will use this to form a hypothetical portfolio by investing it in 5 stocks. (No short sales, margin trades, or trades in ETFs/closed-end funds are permitted. The minimum price of each stock that you can trade is $5.00.) Make your stock selection carefully, as you will not be able to make changes during the semester to Page 1 of 8

this portfolio. To determine how much you have invested in any particular stock, multiply the stock price by the number of shares you buy. You must use at least $900,000. Any leftover will be held as cash. To get stock price information, go to TELMET or www.google.com or www.yahoo.com and click on Finance (I will try to get you access to TEMET shortly. However in order to get started Google and yahoo has much of the information you need). Enter the ticker symbol of your stock and click on historical prices. (An easy way to set up your portfolio is to track it in Yahoo finance or Google finance, but you can also record the prices in a spreadsheet yourself this will help later.) Managed portfolio Register your group on the Stock|Trak website by following this link: http://www.stocktrak.com/public/members/registrationstudents.aspx?p=FIN651-F12-WEB Stock|Trak is a trading simulation service that allows you to trade stocks and other securities during normal trading hours. The website also has many additional features to allow you to track security prices and research markets and individual companies. The fee for Stock|Trak will be paid by the school. Accounts will be active on Monday, September 10. Start with $1,000,000. Establish your portfolio by buying 5 stocks before October 8. Note that you are permitted to trade in both stocks and mutual funds/exchange traded funds, conduct short sales and margin trades, but cannot take a position limit greater than 25% of your portfolio in any one asset. The minimum price of each stock that you can trade is $5.00.
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Monitor and manage your portfolio under the following restrictions: Conduct at least 10 additional trades over the course of the semester. These trades should represent consistent management (i.e. dont cluster them in the last week of the class). Over the course of the semester you must make at least one short sale, and one margin trade. Your stock picks for both portfolios are due on Monday, October 8. For each portfolio separately, list the name, ticker, industry, price, and the number of shares you purchased of each stock. For the buy-and-hold portfolio use the Monday, September 24 closing prices as your purchase price, for your managed portfolio use the actual prices you purchased at. Tally your holdings and include the total investment and the amount held in cash. Also tell me what your groups investment strategy is and why you chose these particular stocks. Follow your portfolio of stocks throughout the semester and be prepared to talk about them in web discussion (included in class participation grade). Keep up with the performance of your portfolios and major news about your stocks. Part 2 Analysis: Risk and return, portfolio diversification (40% of your final grade) Due: December 10th, Monday Here is the time to apply in practice what you learned about portfolio theory! The purpose of this assignment is to build your own efficient frontier
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spreadsheet. Choose two stocks from your buy-and-hold portfolio for analysis to make your work easier. Download the monthly closing prices for these two stocks for the period September 2007 - August 2012 into a spreadsheet from Yahoo or Google, along with the dividend amounts and dates. Do the same for the S&P 500 index. Calculate the returns for each month for each of these three assets. Calculate the following for each asset (in Excel, using the statistical functions given in parentheses): average return (AVERAGE), standard deviation of returns (STDEV), and variance of returns (VAR). What is the covariance (COVAR) and correlation (CORREL) between the returns of stock 1 and stock 2? Is the average return you calculated for stock 1 and stock 2 your expected monthly return this semester? If not, what monthly return does your group reasonably expect and why? What would be the expected return and the standard deviation of a portfolio that held these two stocks in the following weights: 0%-100%, 10%-90%, 20%-80%, 30%-70%, 90%-10%, 100%-0%? Plot these portfolio returns standard deviation combinations (Important: choose a scatterplot and not a line!). Connect the dots by hand. Address the following questions (about 1 typed page): - Looking at the statistics of the two stocks, does the risk-return trade-off hold? - Which combinations should you avoid? Why?
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- Look at the amount you invested in stock 1 and stock 2 at the beginning of the semester. Assume, for the moment, that these stocks are your entire portfolio. What can you say about the efficiency of the combination you chose? - Which combination would deliver the least amount of risk? Use the formula for the minimum variance portfolio to get the exact weights, calculate its return and standard deviation, and mark it by hand on your plot printout. Would your results change if you had short sale restrictions: whereby (i) you cannot have a lower than -200% weight in any single stock (=50% margin requirement on short sales) and (ii) you are prohibited to short sell? Calculate your portfolio weights and the figures requested above in these two special cases separately using Excels solver. - Draw in the CAL (by hand) you would choose from, if the monthly risk free rate is 0.05%. Mark the optimal risky portfolio. Calculate the optimal risky portfolios weights in the two stocks, its average return, standard deviation, and Sharpe ratio. Would your results change if you had short sale restrictions: whereby (i) you cannot have a lower than -200% weight in any single stock (=50% margin requirement on short sales) and (ii) you are prohibited to short sell? Calculate your portfolio weights and the figures requested above in these two special cases separately using Excels solver. - How much money should a risk averse investor with $1,000,000 wealth put in each stock and in the risk free rate to maximize his utility, if his risk

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aversion coefficient is A=2.82? Calculate this for each of the 3 cases in the prior question. - Also mark on your plot where the market index (i.e. S&P 500) falls. What does this suggest about your stock selection? What to hand in: A hard copy of your plot, results, and analysis. E-mail the Excel file you worked with to [email protected]. Each team member needs to hand in at the same class a confidential hard copy of the evaluation of other team members (form posted on Blackboard). Part 3 Final report assessment of your portfolios (50% of your final grade) Due: December 10, Monday The portfolio game for both portfolios is over on December 3rd. A report summarizing the performance of your groups portfolios is due on Monday, December 10. Compare your two portfolios and the S&P 500 index based on the total return and based on other performance measures available. Report on the buy-and-hold portfolio Use the November 25 closing price of your stocks to calculate your returns. What is the final market value of your portfolio (including dividends received)? (Assume that dividends are not reinvested and that any cash held does not earn interest.) Report the purchase and sale price of your stocks from the beginning and end of the semester along with any dividends you might have received.
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Calculate the buy-and-hold return of each stock [(MVendMVbeginning+DIV)/MVbeginning] and the buy-and-hold return on your portfolio (cash included). Comment on the individual and portfolio returns and on any information / event (market-wide or firm-specific) that may have contributed to the performance of your stocks. (Suggested length: about a paragraph for each stock). Also calculate the return on the S&P 500 index over this same period. If you held the S&P 500 instead of your stocks, how much money would you have ended up with? Would you have been better or worse off to hold the index? Discuss any possible reasons for why this is the case. Calculate and plot the market value of your portfolio for each day (including cash). I suggest that you do this by adding up the daily closing market values of your assets held and the cash you hold, including the total dividends received up to date. Calculate the return for each day on your portfolio using the daily portfolio market values you just calculated. How risky was your portfolio compared to the index? Calculate the average daily return and the standard deviation of daily returns for both the S&P 500 index and your portfolio. Also calculate your portfolios beta by calculating the covariance of your portfolios daily returns with the S&P 500s daily returns and dividing that with the S&P 500s variance (see the formula we learned for calculating beta). Use the standard deviation and beta to calculate Sharpes ratio, Treynors measure, and Jensens alpha for your portfolio and for the market

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index, i.e. the S&P 500. Assume that the annual risk-free rate is 0.6% - dont forget to turn this into a daily figure for your analysis. Finally, if this class continued, and you had the chance to alter your portfolio holdings now, would you choose to sell any of your stocks or would you want to keep holding them? Explain for each stock why you would choose to sell or hold. Report on the managed portfolio What was your trading strategy? How did you respond to market and firm/industry specific news during the year? Which trade(s) do you consider your most and least successful one(s)? In your report, be sure to include your ending portfolio value (including cash held and dividends received). Provide a numerical analysis of your portfolios performance (return, risk, risk-adjusted return, chart) and compare it to your buy-and-hold portfolio. What to hand in: a hard copy of your typed report (about 5-6 pages 1.5 spaced and 12 font), and an appendix with your results, market value plots, and supporting calculations. Format all your work neatly. Provide an executive summary of one paragraph, make sure that your report has a logical structure, and it is well-written. E-mail the Excel file you used for the buy-and-hold portfolio to [email protected]. Each team member needs to hand in a hard copy of the evaluation form about the other group members (posted on Blackboard).

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