Important instructions:

• The main point of contact for this assessment is your tutor. But, any technical issues relating to your trading account should be directed to xxxxxxxxxxxxxxxxxx.

• All the calculations and analyses should be done in an Excel spreadsheet. All the return calculations should be presented as decimals, not percentages, and approximated to six decimal points. This Excel spreadsheet should be submitted with the report. It should be named as follows: BFF3121_Portfolio Project_xxxxxx. Replace xxxxx with your own student ID.

• Late submission penalty: 5% per day or part thereof (including weekends and holidays) of the total marks earned.

Assessment type: Individual

Weight: 15%

• Word limit: Maximum 5 pages (Font: Times New Roman; Font size: 12; Line space: 1.5)
• The trade confirmation will appear in your trade management module and transaction log module. Detailed transaction history should be downloaded to an Excel spreadsheet and submitted along with the report.

• Regularly check “RPM Q/A forum” to post/discuss RPM related issues

Objective

The objective of this project is for you to manage a portfolio by investing $500,000 of your imaginary money in any stocks, options, or futures that are traded on the Australian, US and other international stock exchanges. You can also execute short selling, and trade on margin at an annual interest rate of 4%. There is no need that your portfolio should necessarily outperform the market. What you are expected to do is to use the concepts you learn in this unit to take buy/sell/hold decisions of securities, trade frequently, analyse the performance of your portfolio and submit the report together with other necessary files.

Project guidelines

The investment project starts when your account in ‘Rotman Portfolio Manager’ (RPM) will be reset to a cash balance of $500,000 on Friday in Teaching week 2, 5^th August at 9pm (AU time). This is the trading week 0 of your eight-week investment horizon. You then take buy/sell/hold decisions of securities throughout each week over an investment period of eight weeks. Your investment period ends on Friday in teaching week-9, 23^rd September, 2022. It is very important that you use the investment concepts that you learn in this unit in your buy/sell/hold strategies/decisions. These concepts include the following: financial instruments and markets; historical returns of various financial assets; risk aversion and capital allocation; assets allocation and security selection; risk- return trade-off; diversification and risk reduction; market risk and diversifiable risk; margin trading and short selling; fundamental analysis, technical analysis and market anomalies; and equity valuation and detecting mispriced securities. In addition, you should also monitor the performance of various stock markets, domestic/regional/global economies, and other domestic/regional/global events to develop a sense of what is happening before taking buy/sell/hold decisions.

You can invest a portion of your money in risk-free money market funds that will earn 1% per annum. The trading simulation has been set-up assuming that the money that you did not invest in risky securities is invested in money market funds earing the above rate. This means that you do not need to specifically invest in money market funds. However, the maximum amount you can invest in

money market funds at any time is $100,000. This means that all the remaining money should be invested in risky securities. If you invest more than $100,000 in money market funds, a penalty of 10% per week will be imposed.

You are expected to perform the role of a portfolio manager whose performance will be judged   against   the   ASX200    Index,    which    means    that    you    will    be    evaluated against a highly diversified equity portfolio. Therefore, at the end of each week (i.e. on every Australian Friday beginning from teaching week 3) you should record the value of your portfolio, the value of the ASX200 Index and the value of the risk-free asset (i.e. the rate of Australian 90-day T- bill rate) in Microsoft Excel spreadsheet. This Excel spreadsheet should be maintained until the end of the project and all the analyses should be performed in this spreadsheet.

You then use the following equation to calculate the holding period rate of return (HPR) for each week for your portfolio and the ASX200 index:

You also need to calculate the holding period return for the risk-free asset every week. During the eight-week trading period, the only thing you need to do is to trade frequently, report weekly values of your investment portfolio, ASX200 Index and risk-free asset, and calculate weekly holding period returns.

You analyse the performance of your portfolio once the eight-week trading period is over. I will discuss portfolio performance evaluation in week 9 lecture. The content of this lecture, together with other concepts and models discussed in previous lectures, should be used in evaluating the performance of your portfolio. Thereafter, you should write a report to your manager demonstrating your performance over the eight-week period.

Opening the RPM account and trading

To familiarise yourself with this trading platform, you can practice trading in weeks 1 and 2. You are not obliged to practice, but it would be wise to become familiar with the platform prior to the commencement of your “real” trading. Your performance during the practice period will not contribute to your grades. No record of your trading activity during this period will be retained.

It is very important that you open the trading account in RPM before 11:55pm of Friday 5th Aug 2022 (teaching week 2) (AU time). On this date, your cash balance will be reset to $500,000. Failure to open an account with RPM will results in a penalty as follows:

• Delaying to open the account by one week or a part thereof: 20 marks penalty (i.e. you lose 20 marks out of the marks you received).
• Delaying to open the account by two weeks or a part thereof: 40 marks penalty (i.e. you lose 40 marks out of the marks you received).
• Delaying to open the account by three weeks or a part thereof: 60 marks penalty (i.e. you lose 60 marks out of the marks you received).
• Delaying to open the account by four weeks or a part thereof: 100 marks penalty (i.e. you will receive 0 marks).

The following are main features of your trading account:

• On Friday of week 2, you will be provided with a cash balance of $500,000. This amount is to be used for your trading activities.

• You may trade as much or as little as you like across any number of securities, but a minimum of 3 trades is required per week.
• The maximum amount that you can invest in a particular security in one single trade is 20% of the Initially available funds($500,000). This means, for example, if you invest $400,000 in stocks in trading week 1, you need to invest at least in four companies’ stocks.
• Your objective is to enhance your portfolio value through the execution of well-considered trades. But, there is no need that your portfolio should necessarily outperform the market.
• Short-selling of shares is permitted.
• Brokerage rates vary according to the value of the stock:
  • Share prices >$2.00/share: 0.10% of face value
  • Share prices <$2.00/share: 10.0% of face value
• When you create the RPM account, you must use your Authcate + code as your username (see instructions below). If you make a mistake when you are creating an account, please advise Mrs Alpana Trivedi IMMEDIATELY, so this can be corrected.
• If more than one RPM account is created, you will be required to reimburse the university for the additional cost incurred. (See “IMPORTANT NOTE” below.)

Friday teaching week 2 is the week 0 of your trading period. By this time, you must have opened your trading account which will be given a cash balance of $500,000. You can start trading securities from Saturday of teaching week 2. Students should be aware that International markets trade on different Australian times. It is your responsibility to know when those markets are open for trade. If you place a market order, you should place it when that particular market is open. If not, your trade will not be executed. You can place price contingent orders (limit buy and limit sell orders) when the market is closed, but they will be executed only if the price reaches the limit specified by you when the market opens next day. (If the Limit order does not get executed then it will NOT be counted as a transection). You should execute at least three buy or sell transactions each week (i.e. Friday to Friday, Australian time). If you haven’t executed at least three buy or sell transactions per week, you will lose 10 marks for each week. To avoid the risk of not being able to do three transactions per week (for example, due to any technical issues), my advice is that you do more than three transactions per week and do your trading early in the week rather than waiting for Thursday or Friday.

It is very important that you download the trading history of your account to an Excel spreadsheet on the last day of trading (refer to ‘Portfolio Analysis’ section on page-12 of ‘RPM – Students – Advanced User Guide’). This should provide evidence that you have engaged in active trading during the eight-week investment horizon. We will cross check this trading history with your trading account for authenticity. This trading history should be submitted with your report as a second tab on your Excel file. If you don’t submit the trading history, your report will not be marked and you will get zero marks for the project.

RPM help:

Students can watch videos https://rpm.rotman.utoronto.ca/Students/#section2 Learn features of RPM by visiting: https://rpm.rotman.utoronto.ca

FAQ document will be available in RPM folder

Report content

Your report should at least include the following:

1. Weekly values of the portfolio, ASX200 Index and risk-free asset (T-bill rate).
2. Weekly returns for the portfolio, ASX200 Index and risk-free asset (T-bill rate).
3. Monthly returns for the portfolio, ASX200 Index and risk-free asset (T-bill rate).

(You need to convert weekly returns into monthly returns in each week using the effective rate concept discussed in class.)

• The arithmetic average and standard deviation of monthly returns of the portfolio and

ASX200 Index.

• The geometric average of monthly returns of the portfolio and ASX200 Index.
• The arithmetic and geometric averages of monthly returns of the risk-free asset (T-bill rate).
• Performance evaluation:
  • Evaluate the performance of your portfolio relative to the total risk of the portfolio. This would be the case, if you were the only portfolio manager your boss employed. (See point 8 below for more information.)
  • Evaluate the performance of your portfolio relative to both systematic/market risk and residual risk. This would be the case, if you were one of many portfolio managers your boss employed. (See point 9 below for more information.)

It is important that you evaluate the performance of your portfolio under both these approaches. Use monthly returns for evaluating portfolio performance.

• For the approach that uses the total risk as the measure of portfolio risk:
  • Report the Sharpe measure for your portfolio.
  • Report the Sharpe measure for the ASX200 Index.
  • Report the M² measure for your portfolio.
• For the approach that uses the systematic/market risk and residual risk as the measure of portfolio risk:
  • Report the beta of your portfolio together with a reference to its statistical significance.
  • Report the correlation coefficient between your portfolio and the market, and the proportion of the variability of portfolio return explained by the market movements.
  • Show that the variance of your portfolio is equal to the total risk of your portfolio (which is equal to the sum of market and diversifiable risks).
  • Report the Treynor measure for your portfolio.
  • Report the Treynor measure for the ASX200 Index.
  • Report the Jensen’s alpha for your portfolio.
  • Report the information ratio for your portfolio.

All the calculations and analyses should be done in Microsoft Excel. On the top corner of the spreadsheet, you need to provide the following information: (1) Your name; (2) Your student ID; and

• Your RPM trade ID. You can use Excel functions in your calculations and analyses. Your Excel file should also be submitted with the project report. If the Excel file is not submitted, you will get zero marks for the project.

Data sources

ASX200 Index: Yahoo finance web site (https://finance.yahoo.com/)

Australian 90-day T-bill rates: Use the 90-day bank discount rate as the risk-free rate. You can visit RBA (www.rba.gov.au/statistics/tables/)or Australian Department of Treasury (treasury.gov.au)

Report structure

When preparing the report, you need to refer to the Excel spreadsheet whenever necessary. It is important that you reproduce Excel calculations in the tables and other necessary sections of this report.

Your report can be structured as follows:

Preliminaries (3 marks): The first page of the report should contain a letter to your manager. Remember, your report should be written to your boss – as a report on your performance over the eight weeks. The second page of your report is the title page. The third page of your report is the table of contents.

Note: Next five pages contain the performance analyses. The five-page limit applies only to this section. In other words, the letter to manager, title page and the content page are excluded from the five-page limit.

Introduction (5 marks): Provide a brief introduction to your project. Briefly explain what you did, what is the outcome and what contains in the remainder of the report.

Portfolio strategy and outcome (22 marks): Explain the investment concepts you used in your investment strategies and buy/sell/hold transactions/decisions, and other domestic/global circumstances considered in these decisions/strategies. Present the following from week 0 to week 8 in a table and explain what you observe: portfolio value at the end of each week; ASX200 index value at the end of each week; T-bill rate at the end of each week.

Note: Refer to the appendix which contains your trading history in this section.

Portfolio returns and descriptive statistics (20 marks): Present the following from week 1 to week 8 in a table and discus them: weekly returns for the portfolio, ASX200 Index and T-bill rate (risk-free asset); and monthly returns for the portfolio, ASX200 Index and T-bill rate (risk-free asset). Additionally, present and discuss the following: arithmetic average and standard deviation of monthly portfolio returns; arithmetic average and standard deviation of monthly ASX200 Index returns; geometric average of monthly portfolio returns; geometric average of monthly ASX200 returns; arithmetic average of monthly risk-free rate; and geometric average of monthly risk-free rate.

Portfolio performance relative to total risk (15 marks): Present performance measures based on the total risk and critically evaluate the performance of your portfolio. Remember to compare with the market.

Portfolio performance relative to market risk (20 marks): Present performance measures based on the market risk and critically evaluate the performance of your portfolio. Remember to compare with the market.

Conclusion (8 marks): This section concludes your report. In this section you should discuss whether your portfolio strategy worked or not. In other words, if your portfolio performed better than the benchmark ASX200 Index, you should tell us why you think your portfolio outperformed and what you could have done to improve your portfolio’s performance further. Similarly, if your

portfolio underperformed the benchmark, you should tell us why you think your portfolio underperformed and what you could have done to improve your portfolio’s performance.

Referencing (2 marks): Cite any references used following a standard referencing style. Reference list is excluded from five-page limit.

Presentation (5 marks): Report structure; professional style; Format of tables; Use of graphs; Presentation and reference to appendices etc. Note that you have to submit your trading history as an appendix. Appendices are excluded from five-page limit.

Submission

Use the submission link available on Moodle site to submit your report and other documents. Before hitting the submit button, make sure that you have attached the following files:

1. Report – either a Word file or a pdf file. (Named as follows: BFF3121_Portfolio Project_xxxxxx. Replace xxxxx with your own student ID.)
   • Excel file containing your calculations and analyses on first tab and transection data on second tab (Named as follows: BFF3121_Portfolio Project_xxxxxx. Replace xxxxx with your own student ID.)

If you don’t submit any of these files, your submission will be rejected and you will be given zero marks.

Refer to the assessment task schedule on Moodle for the due date. I strongly advice that you submit the report and other necessary files in advance without waiting for the last minute. The full penalty applies even if the submission is one minute late.

Email submissions are not accepted under any circumstance.

No need to submit an assignment cover sheet.

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