FIN359 Investment and Trading Project

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Washington & Lee University *

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359

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Finance

Date

Jan 9, 2024

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5

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Group Project 1: Investment and Trading Project on StockTrak I. Introduction The purpose of this project {game} is to gain “real-world” trading experience. Assume that your group is an investor who just inherited $1,000,000 and you want to invest the money in a diversified portfolio of financial securities. Since you are new to investing and trading, you will first ‘warm up’ using a simulation trading account on Stocktrak . Register and start trading on September 22 nd, and trading continues until November 10 th, 2023. Stock-Trak allows you to apply your investment and trading strategy by giving you access to timely research and allowing you to construct a trading portfolio for your investments and track its performance. It will help you to familiarize yourself with the terminology used for order execution and trading, as well as appreciate the role of information in price discovery. The focus of the project will be for you to actively invest and trade individual equities . However, you will also have the opportunity to invest and trade other assets including: bonds, options, cryptos, currencies and funds. Stock -Trak provides you with a user-friendly website where you can place orders, view your account statements and trading summaries, and of course, compete against other groups! On the home page, you will be able to view your group’s results along with the class ranking. A useful guide is here . To register your account, click here and sign up. Come up with a group name that reflects your investment objectives. Note: If you use AI tools to help you with any part of this trading project (security selection, allocation, trading, rebalancing…etc), please make sure to indicate how you did it and the website/tool/app/platform you used. If you use AI-assisted tools, please reflect on their usefulness in the last part of the project. II. General Rules of Trading Each group will have $1,000,000 in their simulation account. Each group is required to initially invest 50% of the portfolio in individual equities. For the remaining half, you can still trade individual equities but are also allowed to allocate this portion to trade bonds, options, cryptos, currencies, funds…etc. (NOTE: StockTrak has limited bond offerings and prices are not frequently updated). Each group is required to trade a minimum of 20 securities in the first four weeks. 1
Step 1 Investment Objectives & Strategy Step 2 Security Selection Step 3 Implement Initial Trading Portfolio Step 4 Monitor, Evaluate & Re-balance Step 5 Investment Performance Assessment Each group is required to make a minimum of 60 and a maximum of 100 transactions throughout the trading period. For every trade, make sure you include the trade notes on why you are investing or disposing of the security. Include references to your information as part of the trade notes. Make sure that by the end of the second week of trading that your cash balance does not exceed 20% of your portfolio. Short selling and trading on margin are allowed. III. Project Steps Step 1: Investment Objectives & Strategy Due September 18 th 2023 You should write down your investment objectives & strategy in 1-2 pages maximum that outline in brief : Investment Objectives: Briefly describe the investor that your group represents. What is the investor’s age, lifestyle, and risk tolerance 1 ? What short-term and long-term needs does this investor want to achieve through the investment portfolio? Investment Strategy : Develop an investment strategy for selecting your investments that fits the investment objectives. This can be a strategy you read about or a combination of strategies you 1 You might want to find out your own individual risk tolerance first and then decide what the risk tolerance of the investor the group represents looks like. You can use this survey adapted from your textbook 2
develop. You can find a summary of popular strategies in Investopedia . The strategy must outline the following: o Asset Allocation: How will you allocate your wealth between equities and other asset classes? Why does this allocation make sense? o Security Selection: Equity: What criteria will you use to select individual stocks within the equity portion of your portfolio? Make sure that the criteria are aligned with your investment strategy. Other Asset Classes: What criteria will you use other asset classes that are part of your portfolio? o Trading Strategy: What rules will you use to buy and sell during this short-term horizon? o Risk Management : Discuss the potential risks you will face from investing in your securities. How will you protect yourself from such risks? o Performance Benchmark : Select benchmark(s) for your portfolio. I recommend the S&P500 as one of your benchmarks for the equity portion of your portfolio and any other benchmark you think is relevant to your overall portfolio’s objectives. Step 2: Security Selection In this step, you will select the securities that will make up your initial portfolio and align with your investment objectives and strategy. The initial security selection portfolio must have at least 20 listed securities. One way to help you in your selection is to follow the below steps: Initial Large Security Pool : Make a pool of securities that fit your investment strategy and that fit the criteria you outlined in step 1. Final Security Pool: Evaluate the large security pool and make your final selections. Justify how each security selected matches your strategy and criteria. Include those justifications as trade notes for every security you trade in Step 3. Reference relevant articles to support your choices. Step 3: Implement Initial Portfolio Starting September 22 nd , 2023 Now is the time to invest in your selected securities. Before buying the securities, consider the following: Security Weights: How will you allocate your cash across the different securities? Trade: Now, you finally reached the point where you will trade your selected investments. Think about whether you will place market or limit orders. When does each make sense? Remember to 3
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include trade notes for every security you invest in and include references to articles or sources supporting your trade. Step 4: Monitor, Evaluate & Rebalance Follow up on your portfolio’s performance and implement changes. What will be your trading strategy to keep/dispose of your securities? How will you identify new securities to replace the ones you sell? Remember to include trade notes for every security you sell or buy in subsequent trades throughout the semester and sources supporting your trade. Step 5: Investment Performance Assessment and Reflection Evaluate the portfolio’s overall performance from the start of trading till November 10 th , 2023 (last day of trading) as follows: Analyze the overall portfolio’s return and risk : Include risk-adjusted metrics like the Sharpe ratio, alpha, and beta. You will learn more about how to do this over the next few weeks. Analyze the performance against the selected benchmark(s) : Discuss the reasons for differences in performance. Reflection: Carry out a critical analysis of your investment strategy and reflect on your experience. Make sure to address the following: o Investment Strategy and Asset Allocation: Discuss any changes you would make to improve your investment and asset allocation strategy to achieve the investment objectives better. o Equity Portfolio Attribution Analysis: Reflect on some of our class discussions around optimal portfolio construction by focusing on a sample of your equity portfolio to evaluate the following: Security Selection: Discuss what aspects of the security selection process could have been improved and any changes to the criteria you used to select the securities in the portfolio. Portfolio Allocation: Evaluate your equity allocation strategy. How did you allocate (weigh) your capital across your stocks? From the allocation types we discussed in class (price, market value, equal), what would have been a better allocation strategy if any? IV. Grading Criteria (20%) Due November 15 th 2023 4
You will need to share and reflect on your trading journey in a class debrief presentation and a written report. Your grade will be determined as follows: 15% will be on a written report (< 10 pages excluding Appendices) that discusses the above requirements and is broken down into: Step 1 Investment Strategy (2%) Step 2 Security Selection follows strategy (2%) Step 3 Implement Initial Trading Portfolio with Trade Notes with references (include in an appendix) (3%) Step 4 Monitor, Evaluate, and rebalance following the rules of trade with trade notes (2%) Step 5 Performance Assessment and Reflection (include Excel appendix) (5%) Overall Report Organization (1%) 1% Following the General Rules of Trading 2% Debrief presentation of the project during class on October 20 th 2022 . 2% Performance of the group against your benchmark. 5