F I N 4600 Stock Tlark Analysis

Rules for F I N 4600 ST O C K -T R A K Project
Stock-Trak, Inc. provides students with an inexpensive, and reasonably realistic market simulation. Using real-time 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 Fall 2010 semester. Students should also consult the Stock-Trak site for their rules. Each student will participate in the Stock-Trak simulation project with their own account. Trading will begin on 13 September 2010 and terminate on 26 November 2010. During this period, students are expected to maintain a diary that 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. If you the value from Stock-Trak. It will be easier, though, if you try to keep up regularly rather than collecting the data at the end of the semester. Portfolios are initially assigned a value of $500,000 of which 100% is invested in cash. On 15 September 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, daytrading internet stocks in a portfolio with a target beta of 0.5 is not allowed (in the real world, . On 8 September 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 8 September 2010. 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 website.

Some H ints on the Beta of your Portfolio
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 for stocks or mutual funds is to use a Web-based resource such as Yahoo!Finance, MSN Investor, or Morningstar. You can also find estimates of betas in Value Line which is available in the library, or calculate it yourself. You will probably have to guess at the betas for bonds. Short-term Treasuries will have a beta near 0, while high-yield corporates will have betas closer to the stock s beta (probably lower). You can use a similar bond ETF to estimate the beta of an individual bond. One resource for fixed income ETF data is the iShares site at http://us.ishares.com/home.htm. 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 F all 2010, though they are subject to clarification.