BFB3121 – Investments and Portfolio Management Portfolio Investment Project – Instructions
Word limit: Maximum 5 pages (excluding exhibits)
Assessment type: Individual
The objective of this project is for you to manage your own portfolio by investing $1 million of your imaginary money in any stocks, options, or futures that are traded on the following exchanges: New York Stock Exchange, NASDAQ or American Stock Exchange. You can also execute short selling and trade on margin at an APR of 8%.
The investment project starts when you open an account in ‘Investopedia’ and invest $1,000,000 in a portfolio of securities on Monday in Teaching week 3. You are then expected to take buy, sell or hold decisions throughout each week over an investment period of seven weeks (including the semester break week). At the end of each week, you will be required to compute your portfolio’s holding period rate of return (HPR) for the use in the performance evaluation part of the project.
The formula for computing the weekly HPR is:
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑣𝑣𝑀𝑀𝑣𝑣𝑣𝑣𝑀𝑀 𝑜𝑜𝑜𝑜 𝑀𝑀ℎ𝑀𝑀 𝑝𝑝𝑜𝑜𝑀𝑀𝑀𝑀𝑜𝑜𝑜𝑜𝑣𝑣𝑝𝑝𝑜𝑜 𝑀𝑀𝑀𝑀 𝑀𝑀ℎ𝑀𝑀 𝑀𝑀𝑒𝑒𝑒𝑒 𝑜𝑜𝑜𝑜 𝑤𝑤𝑀𝑀𝑀𝑀𝑀𝑀 𝑀𝑀
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑣𝑣𝑀𝑀𝑣𝑣𝑣𝑣𝑀𝑀 𝑜𝑜𝑜𝑜 𝑀𝑀ℎ𝑀𝑀 𝑝𝑝𝑜𝑜𝑀𝑀𝑀𝑀𝑜𝑜𝑜𝑜𝑣𝑣𝑝𝑝𝑜𝑜 𝑀𝑀𝑀𝑀 𝑀𝑀ℎ𝑀𝑀 𝑀𝑀𝑒𝑒𝑒𝑒 𝑜𝑜𝑜𝑜 𝑤𝑤𝑀𝑀𝑀𝑀𝑀𝑀 𝑀𝑀−1
For example, the value of your portfolio at t = 0 (which is on Monday in teaching week 3) will be US$1,000,000. If the market value of your portfolio at the end of Monday in teaching week 4 is US$1,020,000, then your HPR in week 1 will be [(US$1,020,000 / US$1,000,000) – 1] = 0.02 = 2%. It is vital for you to compute your weekly HPR’s for each of the seven weeks of trading. In addition, you should also monitor the performance of various stock markets to develop a sense of what is happening and to serve as possible benchmarks when evaluating your performance. I recommend that you compute weekly HPR’s for the MSCI World Index as well as some of the following: DJI index; FTSE 100 Index; ASX All Ordinaries Index.
You are to perform the role of a portfolio manager whose performance will be judged against the MSCI World Index – which means that you will be evaluated against a highly diversified equity portfolio. Your report should be written to your boss – as a report on your performance over the seven weeks.
YOUR REPORT SHOULD CONTAIN THE FOLLOWING:
- A printout of the seven-week trading summary obtained from your ‘Investopedia’ trading account, attached as an appendix. This should indicate that you have engaged in active trading throughout the entire seven weeks period. If the trading summary is not attached, you will get zero marks.
- A table with the seven weekly returns, which are converted into monthly returns.
- The arithmetic average and standard deviation of your monthly returns, together with the arithmetic average and standard deviation of the monthly returns of the MSCI World Index.
- The geometric mean of the monthly returns of your portfolio as well as for the MSCI World Index.
- Two approaches to evaluating your performance:
- Evaluate your performance relative to the total risk of the portfolio. This would be the case, if you were the only portfolio manager your boss employed.
- Evaluate your performance relative to either systematic risk or residual risk. This would be the case, if you were one of many portfolio managers your boss employed.
It is important to evaluate the returns of your portfolio under both these approaches.
- For the approach that assumes that total risk is relevant to your client, you should:
- Show a graph of the CML and indicate where the portfolio is located.
- Report the Sharpe ratio for your portfolio.
- Report the Sharpe ratio for the MSCI World Index.
- Indicate the M2 measure for your portfolio.
- Report the proportion of your portfolio’s risk that is systematic, which will require that you compute the R2 of the Characteristic Line estimate.
- For the approach that assumes only systematic risk is relevant to your client, you should:
- Show a graph of portfolio’s Characteristic Line.
- Indicate the beta of your portfolio together with a reference to its statistical significance.
- Provide a graph of the Security Market Line and show where your portfolio lies.
- Provide the Treynor measure for your portfolio.
- Provide the Treynor measure for the MSCI World Index.
NOTE: In addition to the theories, concepts and techniques that will be developed in this unit, you will need to employ some statistical procedures such as ordinary least squares estimation using Excel, EViews or SPSS in order to complete this assignment.
Instructions to open an account with Investopedia:
- Go to “Investopedia” website and register there with required information. You must use your Monash email address when register.
- Then you can sign in at any time with your password.
- Select “Stock Simulator” option.
- There you can join an existing game to practice until the start date of your assignment. You can also join the practice simulation name “BFB3121” with the password BFB3121
- On the stated start date of your assignment, Monday 23rd March (week 3), choose the option ‘Join Games”, look for the simulation “BFB3121 S1 2020 Assignment” to join in. The password to join this project is “BFB3121S12020”.
- Trading activities will need to be closed by Monday 18th May (Week 10)
Sources to get the data for indices:
Values of MSCI world Index (ticker symbol ACWI) as well as for all the other required indices can be found by in “Yahoo Finance” website. You can get the necessary data for the index by typing the name of the index in the box called ‘Enter symbol- Look up’.
You can also get the values from Yahoo Finance by selecting Market Data > World Indices.
The Australian interest rates are available from the Reserve Bank of Australia.