Students will participate in a portfolio simulation exercise managing an initial wealth stock of $500,000 over the quarter. The simulation program will be professionally managed by Stock-Trak Portfolio Simulations of Atlanta, GA. Students will join into groups and register an account as an investment team for the five-week period. The price per registered account is $17.95. Each team can invest in any NYSE, AMEX or NASDAQ stock (with traded price over $5), a series of government and corporate bonds, and a selection of over 2000 mutual funds. Trades can be submitted via web. Students will receive bi-weekly statements showing account activity, value, and performance versus the S&P 500 stock index, but each team should monitor the position daily. Students can buy on margin and sell stocks short. Details are provided in the Student Registration Materials.
The objective of the investment strategy for our class will be ``to provide reasonable short term growth of principal/capital and income.'' This is a deliberately vague mandate to each investment team. However, by the second week of the course, each team must submit a short statement of objectives that defines an investment style that appears to guide their own performance and therefore performance evaluation (including the choice of appropriate benchmark).
Before you begin the trading game you must submit a preliminary trading game plan to me via e-mail. The plan should:
- Lock in to the certain style of investments (i.e., choose the role you want to play, like mutual fund manager, arbitrageur, etc.)
- Indicate how much capital you will deploy and risk in trading; Are you planning to go short? Do you want to use leverage?
- Identify the trade selection method(s) you will use to identify potential trades (for instance, fundamental analysis, technical analysis, intuition, rumors, artificial intelligence, etc.);
- Indicate your trading time horizon;
- Provide a rationalization of, or evidence to support the trade selection method you adopt (i.e., what persuades you that this method of selecting trades will be profitable?);
- Identify the signals or trading rules that will cause you to execute a trade (e.g., perceived patterns in prices, forecast errors in government economic reports, etc.)
- Indicate the maximum drawdown (or loss of equity) you will tolerate during the period;
- Indicate the maximum initial percent of equity you are willing to risk on entering any one trade;
- Indicate the rules, if any, you will employ for adding to profitable positions (e.g., averaging with the market); (Stated differently, what multiple or fraction of an existing trading position would you add to an existing profitable position and when?);
- Indicate the rules, if any, for adding to unprofitable positions (e.g., "averaging against the market");
- Indicate when, if at all, stop-loss orders will be used;
- Indicate whether you wish to impose any constraints on your trading for reasons of personal comfort (such as limiting the size of trades; the frequency of trading; and not executing trades during certain market conditions (e.g. during panics or choppy markets)).
This report is due on Friday, January 27th by 18:00. Please note that it is not going to be graded separately from the final report. The only purpose of it is to lock you in the set of restrictions you impose on yourself. The requirements with respect to the formatting of this document are minimal (i.e., no fancy stuff please!) I would gladly accept e-mail submissions.
NB: No more than two groups per style! Please flush this problem among yourselves. The ban on intergroup communications is waived for those discussions.
NB: For groups that choose to replicate index: You are legally forbidden to take positions in tracking securities (by me!)
