Stock-Trak, Inc. provides students with an inexpensive, and reasonably realistic market simulation. Using 15-minute-delayed quotes, students may trade various securities in a hypothetical portfolio. Stock-Trak, Inc. maintains accounts, accepts trades, and sends out weekly summary reports. This document summarizes the rules that are specific to Dr. Mayes' FIN 4600 class for the Spring 2004 semester. Students should also consult the Stock-Trak literature for their rules.
Each student will participate in the Stock-Trak simulation project with their own account. Trading will begin on 9 February 2004 and terminate on 23 April 2004. During this period, students are expected to maintain a diary which summarizes each trade that is made, the reasons that the trade was made (with supporting data), any important news event that affects their portfolio, etc. In addition, each student will create and maintain an Excel spreadsheet to track the value of their portfolio on a daily basis (not each individual security, the overall portfolio value). This information will be used at the end of this project, and will be turned in as part of the report. Note that you will be limited to 100 transactions during the semester.
Stock quotes (delayed by 15 minutes) may be obtained from a number of sources. One of the best is the MoneyCentral Investor, which allows you to get quotes and even to track your portfolio. In addition, there are several sources of current business news available. My favorites are Yahoo! Finance (which also provides quotes and portfolio tracking for free), and DailyStocks. Mutual fund information is available from Morningstar. At this time, these services are free and you may access them using a Web browser from our computer labs or your home. Many other financial resources on the internet can be found at Dr. Mayes' Financial Links and the Stock-Trak, Inc site (which also provides on-line portfolio summaries, earnings estimates, news, etc.). As much as I hate to admit it, there is almost no reason to go to the library anymore for this type of information.
Each student will have two accounts: a “trading” account and a “buy and hold” account. The buy and hold account will, on 9 February, contain exactly the same securities in the same quantities as the trading account. The portfolios must start off the same so that we can make a valid comparison at the end of the semester. After 9 February, you will only buy and sell from the trading account. In the final report, you will be asked to compare the results from both portfolios. You need to limit the initial portfolio selections to 20 or fewer securities.
Portfolios are initially assigned a value of $500,000 of which 100% is invested in cash. On 9 February all portfolios are expected to have no more than 20% cash. The balance of the portfolio must be invested in stocks, bonds, or mutual funds. Students are not permitted to trade options, futures, or any other "derivative" security (even though Stock-Trak allows these types of trades). You are required to make at least one trade (buy or sell) per week. Note that you will be penalized for trading too frequently and for trading inappropriate securities. For example, day-trading internet stocks in a portfolio with a target beta of 0.5 is not allowed (in the real world, you’d probably find yourself in serious legal trouble from your clients). On 9 February you are required to submit a report detailing your initial portfolio allocation and the reasoning behind each pick. This report will also describe who you think your client is and what investment objectives you believe are appropriate. Your final report is due on 3 May 2004.
The purpose of this project is to familiarize students with managing a portfolio in the "real world." In accordance with this objective, and those of this course, students will be assigned a target beta for their portfolio. This allows us to simulate the management of a portfolio for a particular individual or institution. Performance will be evaluated using Fama's return decomposition method which allows us to evaluate performance on a risk-adjusted basis taking into account the target beta and the performance of the market. The top five performers, over the course of the project, will be awarded a bonus on their final grade based on their ranking.
Results will be updated weekly on the FIN 4600 Stock-Trak page.
The portfolio beta is simply a value-weighted average of the betas of the investments in your portfolio. Therefore, you need to structure your portfolio such that the weighted-average beta is roughly equal to your target. You do not need to buy only securities with betas close to the target. Even if your target beta is low (high) you may find it beneficial to purchase some securities with higher (lower) betas. The easiest way to find betas is to use the S&P Compustat database (the Research Insight icon in the Windows Applications folder) in the lab or library. You can also find estimates of betas in Value Line which is available in the library, calculate it yourself, or find it at many Internet sites. Once you determine the betas for your securities, you will need to determine the weights. In most cases, there will be a number of combinations of weights that lead to the portfolio beta equaling the target. I suggest that you use the Solver in Excel (or your favorite spreadsheet) to find some combination of weights that work. Do not focus only on the beta of your portfolio. It is important to remember that you are trying to earn a good return while limiting risk. Therefore, you need to pay attention to security selection as well.
This is the final version of the rules for Spring 2004, though they are subject to clarification.