Initial portfolio selection due: Thursday, July 11, 2002 (by email before market close).

Final spreadsheet due: Thursday, August 8, 2002  in class. No projects will be accepted after the class.

The goal of this project is to simulate an active portfolio strategy and compare the results with those of a passive strategy. This project will also help you form a useful habit of market watching.

Identify your stocks by name of the company and the ticker symbol, e.g. MCD for McDonald's, KO for Coca-Cola, T for AT&T. etc. Use the ticker symbols elsewhere in the spreadsheet.

Assume you have $100,000 to begin your portfolio. Each stock will start with the same initial investment, i.e. $20,000 for each of five stocks. Ignore transaction costs and dividends. If your stock splits, you must account for the change in your portfolio.

You will hold five different stocks in your portfolio at all times.

Any stocks listed on any US exchange (NYSE, AMEX, NASDAQ).

Use the closing price on the day you trade for both selling or buying.

Start tracking your stocks using the closing price on Thursday, July 11, 2002.

Any source will suffice, for example http://finance.yahoo.com/ or http://cnnfn.com/.

No matter what time you decide to trade during the day you will use the closing price from that day. You must e-mail me your trade (akurov@binghamton.edu) time-stamped before 4pm when the markets close or else your trade is invalid. Otherwise it is possible to buy/sell after news is announced once the market closes. Keep in mind that security prices fluctuate throughout the day so the price you "trade" at 11:30 am may be higher or lower than the closing price you will use to track your gains/losses.

Can I keep some funds in cash (not invested in any stock)?

No. Your portfolio should be fully invested in stocks at all times. If you sell a stock, all the proceeds should be reinvested on the same day. In case if you have some money left that is insufficient to buy even one share, assume that you can buy a fraction of a share. (Example: You receive $18,900 from selling one of your stock positions and you want to buy MSFT at the closing price of $44. Record the number of shares bought as $18,900/$44 = 429.5454 shares. Keep the record up to fourth digit after decimal point). Since you make the trade before the market close but it will be executed at the closing price, you will know the exact number of shares that you bought only after the market close.

You must make a minimum of 10 trades for this project. Those trades may be split any way you choose in your portfolio. For example, you may choose to NOT make any trades with 4 of your initial picks, but the remaining position would require at least 10 trades.

Consider the following hypothetical portfolio started with Microsoft, Intel, Coke, ATT and Ford with closing prices of $100, $50, $20, $10 and $5, respectively. Your initial positions would be 200 shares of Microsoft, 400 shares of Intel, etc. After two days Microsoft drops to $80 and you sell. Your equity for that position is $16,000 and you decide to purchase 1000 shares of McDonald's for $16 per share. That would count as one trade. 

Your stock positions and returns should be organized neatly in a spreadsheet. Calculate your portfolio wealth each day and percentage returns each day. Display these results on a graph and compare with the returns for the benchmark (see below). I strongly suggest recording your stock and index prices each day. You will be graded on accuracy and presentation of your spreadsheet.

Keep a daily record of three benchmark indices (1) NASDAQ Composite, (2) Dow Jones Industrial Average (DJIA), and (3) S&P 500 Index. All three indexes are available on http://cnnfn.com/ and http://finance.yahoo.com/. Compare your portfolio returns to a passive investment strategy tracking an appropriate index. Of course, there is no such thing as a perfect benchmark. (Unless your goal is to closely track a particular index, an impossible task with only 5 stocks.)

If most of your portfolio is invested in a particular industry you might be able to find an appropriate sector index here. Also, here is information on many sector Exchange Traded Funds (ETFs). The ticker symbols are given after the names of the ETFs. Since these ETFs closely track the performance of their respective indexes, they may also be used as benchmarks.

Did you manage to "beat" the benchmark? If you are interested in research results on performance of active traders, check outpapers of Brad Barber (University of California, Davis). The relevant names are "Trading is Hazardous to Your Wealth", "Boys will be Boys" and "Online Investors: Do the Slow Die First?". The summary of the results is given in this easy to read article. Barber's coauthor, Terrance Odean (UC Berkeley) talks about their work in this streaming video presentation. You may also want to read articles on indexing on Bill Sharpe's homepage.

What are the most important risks affecting your portfolio?  Are there ways to lower the risks?

In conclusion, comment on what you have learned from this project. Comment on anything else that you found interesting or noteworthy while doing this assignment.

Re-calculate your entire portfolio wealth and returns after taking into account transaction costs. Assume a fixed commission of $15 per trade. Each buy or sell transaction will count as one trade, i.e. if you sell Microsoft and buy McDonald's that will count as two trades. Also assume that you sell your security for 0.6% less than the closing price (simulate the bid price) and buy your security for 0.6% above the closing price (simulate the ask price). What is the effect of including the transaction costs?

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