Portfolio Management Project FNAN 311

Portfolio Management Project

FNAN 311 is designed to provide students with an introduction to modern portfolio management and asset valuation. Through this course, students will gain a systematic understanding of financial markets, the various types of financial instruments, and the main investment theories. The group project provides students an opportunity to apply modern investment strategies and risk management tools to near real-world portfolio management without real-world risk. Students are required to design a trading strategy (including security selection), implement the strategy (execute the trades), and evaluate the performance of the portfolio. The trading platform for the project is the Virtual Stock Exchange at http://vse.marketwatch.com (or http://www.marketwatch.com/game/finance311spring2015)

The Scenario

You are beginning your new job with Patriot Investment Strategies, a mutual fund family managing approximately $50 billion in assets. Patriot has a variety of funds with various objectives. You and several new associates, as a group, have been asked by management to create and manage a new fund based on your own ideas, benchmarking the performance of the fund against an existing index. You have learned that the other forty new associates at Patriot have received similar assignments, and that the performance of each fund will be evaluated by management six weeks after the inception of each fund. Management has indicated that, although, the fund’s total return as measured against the chosen benchmark is certainly important, due to the short time horizon, the novelty and effectiveness of your investment strategy may be even more important in making you standout as the next star money manager of the firm (and the recipient of the biggest year-end bonus).

Trading Period: February 18, 2015 to April 13, 2015, seven weeks of trading.

Grading

The project represents 20% of the final course grade. Out of 20 points, 10 points will be assigned to the final report submitted; 10 points will be assigned to the in-class presentation (20 min for each group).

Fund Prospectus (before trading starts, for your own group): The fund prospectus is intended for prospective investors and outlines your investment plan. Your prospectus should answer the following questions. What is your goal for this fund? What strategy will you employ? What is your benchmark? Why? Consult a real mutual fund prospectus to have an idea on presentation and what to include. After reading your prospectus, investors will decide whether they should invest in your fund.

Final Project Report (10%): Due April 27, 2015 in class in hard copy and electronic copies sent to me as well. This report will be sent to your investors at the end of the investment period and will give them a summary of the fund performance. Investors want to know how the fund has performed compared to your initial plan. After reading your report, investors will decided whether they should continue to invest in your fund or should they change the amount of funds they put in your group. Your report should be within 6 pages, double-spaced (consult a mutual fund year-end report for a general idea of what to include). You may append tables and figures (no more than 5 additional pages) at the end of the report as supporting documents. Your name must appear in the cover page to receive credit.

Presentation (10%): Fund managers often give presentations to major investors about their fund performance, and answer questions the investors may have. To mimic this situation, each group will give a 15 to 20 minute presentation of their fund to the whole class. Every member of the group will participate in the presentation. Members of other groups, acting as the major investors, should ask questions and evaluate the presentation. You may use either a PowerPoint slide show or transparencies in your presentation. Presentation slides are due April 27th, 2015 in electronic format, when presentations are held in class. Your name must appear on the first slide and you must participate to receive credit.

Peer Evaluation: Within the same group, each member’s contribution may differ. To account for this, each member is required to file a peer-evaluation for the other members within the same group. This peer-evaluation will be taken into consideration in determining each individual’s grade.

Rules:

1. You will manage $1,000,000 in one portfolio. Short selling and buying on margin are allowed. Remember that the current maximum margin is 50%. Thus, your allowable buying power is $2,000,000!

2. When you place an order, you will be charged a commission fee. Although you are allowed to re-balance your portfolio as frequently as you desire, bear in mind that transaction costs can add up and lower your performance. On the other hand, this is a good opportunity to test any day-trading strategies.

3. You are allowed to place (and are encouraged to try out) different types of orders: market orders, limit orders, stop-loss orders, etc. [The commission fees may differ for different kinds of orders and securities.]

4. You must confirm each order to complete any transaction.

Academic Honor Code: Group members are permitted and courage to communicate within each group about the project. Group members CANNOT communicate the project with members of another group. Plagiarism will not be tolerated under any circumstances.

How to start with the Virtual Stock Exchange?

1. Please go to http://vse.marketwatch.com

2. On the left hand side tab, choose and click “Find a Game to Join”

3. Enter our game id: finance311spring2015, and the game should appear. If this is your first time logging into this website, your will need to register first, so please follow the instructions. Later, you may log in directly.

4. You still need a password for this private game. The password is “fnan311”. Then click “Join Game”.

5. Read the Game Rules carefully, as it specifies important settings for the game including your initial cash amount, trade commissions, etc.

How to Start Trading?

Before planning on your trading strategy, you should first think about your own preferences. What is your investment goal – for retirement or speculation with free cash? This will determine how much risk you can tolerate. Do you want to diversify across different geographic locations, sectors/industries, select particular securities, market time?

Possible trading strategies:

1. Momentum strategy

2. Post-earnings drift

3. IPO underpricing

4. IPO long-term underperformance

5. Following insider transactions

6. Takeover target premiums (merger arbitrage)

7. Mad Money

8. Contrarian strategy (Buffet analysis)

9. Value Line recommendations, and other investment newsletters

10. Macroeconomic fundamental analysis

You may apply any of the strategies above (and many more); and you are encouraged to discover and implement new strategies.

Where to find individual company information? You may use the Bloomberg terminal to retrieve useful information on individual securities and portfolios.

Online information sources include: finance.yahoo.com, SEC online filing (EDGAR), and many financial papers.

Guidelines for Preparing the Final Report:

Here are some suggestions regarding your final project report. The report can include the following parts:

1. Cover page: Title, authors, date, etc.

2. Abstract: A short paragraph summarizing the main points of the report (fewer than 100 words).

3. Introduction: Briefly describe the following. What have accomplished in the project? What are your investment goals, your investment benchmark, and trading strategy? How did your fund perform relative to the market? Specify some main performance metrics, such as the Sharpe ratio. At the end of your Introduction, briefly lay out the organization of the remaining part of your report.

4. The Fund: Describe in detail your investment strategy and why you chose this particular strategy for your fund. What are the main holdings in your fund? Why did you choose these securities? Which are the major winners and the major losers? Did you make profit by long or short positions? What kind of orders did you place (e.g. market orders, limit orders)? You may append tables to present your results and facilitate your discussion, and refer to the appended tables in the text.

5. Performance Evaluation: In this part you discuss the rate of return of your fund over the investment period. How does it compare with the market, and the other groups? You may plot returns in a graph for ease of comparison. How risky is your fund – the beta and the volatility. What are the performance metrics of your fund, including the Sharpe ratio and Treynor measure? You may append tables to present your regression analysis and summary statistics.

You may further interpret the empirical results and discuss their implications. What have you done correctly and what would you change in managing your fund? If your strategy did not perform as you expected in the investment period, you would want to discuss why. Or, if you believe the results do not fully reflect the effectiveness of your strategy, explain why you think so. If you have many securities in your portfolio, you can choose to focus on a select few to discuss in detail.

6. Conclusion and Discussions: Summarize the main points of your report. What have you learned from the fund management performance evaluation?