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Lesson 1: Introduction

Introduction to the How the Market Works Investment Challenge

Throughout the duration of this course, you will be participating in a team investment challenge. The investment challenge is your opportunity to see if you and your team have what it takes to be “players” on Wall Street. Together with your teammates, you will apply the principles of investments to a “real-life” investment situation, buying stocks to create a team portfolio. This will require you to develop an investment strategy and is designed to introduce you to investing in equities by establishing an active equity portfolio.

Your performance will be compared to other teams, the S&P 500 and the instructor’s portfolio. There is no right answer for this assignment; each of you will define your own team’s return objectives and risk tolerance and describe your strategy. Teams will have $100,000 to invest in at least five common stocks over the course of the game.

The game is designed to be a learning experience. Students will be required to relate investment theory covered in the course and discuss it in their performance memos. Your grade will depend on the quality (not quantity) of your performance reports and not your actual performance of your portfolio. First Memo and Midpoint Performance reports should be no more than one page of text, plus tables and attachments if desired.

In addition to having fun, we will apply theory to practice. You will learn valuable insights that can be applied in your personal and corporate investments. Hopefully lessons learned in this game will allow you to make more informed decisions when some day you will be responsible for managing your own investments for retirement.

Steps and Points in the Investment Challenge Grading (50 points total)

As previously mentioned, the How the Market Works Investment Challenge spans the entire course. You should have received an e-mail from your instructor providing you with the link to the How the Market Works exercise and the specific team to which you have been assigned. This e-mail and the How the Market Works Web site itself provides you with a lot of details on how to purchase stocks.

In addition to this information, let's also review the major milestones for this project. There are four milestones where your team will be required to provide updates. Click on the tabs to learn about each milestone and its associated point value.

Step 1: Create your Active Portfolio & Memo: 10 pts (Due Lesson 2)

  1. You will use the link sent from your instructor to take you to the How the Market Works challenge. Your team will set up your portfolio and follow the guidelines outlined in the e-mail from your instructor and on the How the Market Works Web page.
  2. Create a stock portfolio of individual stocks or Exchange Traded Funds (ETFs). You should include at least five investments. You are free to buy and sell stocks at any time during the game.
    1. You may wish to go to Stock Screener. This is a stock selection screener provided by Hoovers.com that allows you to put in your criteria.
    2. You can find other resources at PSU library databases.
  3. Summarize your reasons for your initial stock purchases in a short memo and submit to the provided drop box. Only one memo per team should be submitted. For each stock briefly describe key factors for your decision to include the stock in the portfolio.

Step 2: First Evaluation Memo: 10 points (Due Lesson 4)

  1. Monitor Your Actively Managed Portfolio
    1. This monitoring should occur on an ongoing basis from the time your team makes its first investment until the end of the activity.
  2. Prepare a one-page memo that summarizes your performance for the first part of the semester.
  3. Briefly discuss changes that you have incorporated or should incorporate to enhance the performance for the remainder of the challenge.
  4. Compare your performance to S&P.
  5. Summarize your major reasons for buying and selling the stock over this time period in a short memo. Only one memo per team should be submitted in the drop box provided in Lesson 4.

Step 3: Second Evaluation Memo: 10 points (Due Lesson 8)

  1. Monitor Your Actively Managed Portfolio
    1. This monitoring should occur on an ongoing basis from the time your team makes its first investment until the end of the activity.
  2. Prepare a one-page memo that summarizes your performance now that we have studied a little more about corporate stocks and risk.
  3. Briefly discuss changes that you have incorporated or should incorporate to enhance the performance and account for risk for the remainder of the challenge.
  4. Compare your performance to S&P.
  5. Summarize your major reasons for buying and selling the stock over this time period in a short memo. Only one memo per team should be submitted in the drop box provided in Lesson 8.

Step 4: Final Performance Report: 20 points (Due Lesson 12)

  1. Written Report
  2. In this final report you will assess the performance of your investment strategies in a one to two page double-spaced paper. You may attach as many pages of tables and exhibits as you wish.
  3. Address each of the following questions:
    1. What was the total return on your benchmark portfolio?
    2. Did you do better or worse than the S&P 500? Can you explain why? Be specific! You do not need to adjust this portfolio for taxes or fees for this comparison.
    3. Define how risky your portfolio was in terms of a weighted beta compared to the S&P 500. (Note: this does not need to be exact for those who made many trades. Just try to estimate the beta of the portfolio over this time period as close as possible. Beta of cash is zero.)
    4. How did your portfolio perform compared to the S&P 500 on a risk adjusted basis. (Note: the beta for S&P 500 is equal to 1. Use the CAPM with the S&P 500 as your expected return parameter.)
    5. What did you learn from this assignment and this class that will make you a more knowledgeable investor? Be specific! 
    6. What adjustments did you make in the second portion of the stock challenge?
    7. How will you apply this knowledge personally going forward. (For example retirement planning.)
  4. Place your final report in the drop box provided in Lesson 12. Only one report per team should be submitted.

In addition to the points referenced above, you can also earn five bonus points for beating the “benchmark” S&P 500 portfolio.

General Guidelines

Choose one individual to initially set up your team portfolio on How the Market Works and ensure that your team meets the minimum requirements stated below.

  1. Go to the How the Market Works site for official challenge beginning and ending dates.
  2. Invest at least $20,000 by the second Monday of the course (beginning of Lesson 2).
  3. Be fully invested; $100,000 for at least one week.
    (This does not mean that you need to hold the same stocks for that period, but if you sold a stock you would need to immediately buy another stock. For example, you could meet both of these requirements by investing $100,000 in five stocks on the first day of the game and selling these same five stocks on the last day of the game—simple buy and hold strategy).
  4. Additional trades are encouraged.
  5. You will decide as a team how much money to invest in each transaction.
  6. You must complete a minimum of 10 trades (buy five stocks and sell five stocks). Buying and selling the same security counts as two trades. You will lose five points for each trade under the 10-trade minimum.
  7. You can make as many trades as How the Market Works allows.

Using the Library Resources

As you begin your work with your teams, consider the resources available to you via the Library. The Library System here at Penn State is a tremendous resource available for you to use when conducting research. A link to the library and finance librarians is located on the left-hand navigation menu on your screen.

One resource in particular may be of interest to you and your teammates is Yahoo's Stock Screener. This Web site, previously referenced, is a stock selection screener provided by Hoovers.com that allows you to put in your criteria.


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