SML9: That's My Final Answer

After nine exciting and generally unpredictable weeks, the end of the virtual stock market game has arrived. Here are the changes from last week:

Aetna: +0.95 to 77.40
Barnes & Noble: -0.32 to 41.02
Motorola: +1.18 to 21.18
Safeway: +0.55 to 24.3
Lockheed Martin: +0.40 to 62.40

And here are the overall results:

Aetna: -2.35 (-2.95%)
Barnes & Noble: +2.83 (+7.41%)
Motorola: +3.44 (+19.39%)
Safeway: +1.78 (+7.90%)
Lockheed Martin: -2.66 (-4.09%)

Overall Portfolio Value: $105,503.40 (+5.51%)
S&P 500 Index: 1234.18 (+3.19%)

Along with these final results, I have to turn in some calculations and the answers to a few questions. I have included these for your reading pleasure. You're welcome.

1. How did you select your stocks?
I tend to be pretty conservative where my money is concerned. I'm not a big risk-taker in general, and I typically think of gambling as a tax on people who are bad at math. So in choosing my stocks, I took four things into account. First, I stayed away from companies in high-risk industries such as airlines and pharmaceuticals. Second, I looked for established companies, those with recognizable names and a long history. Third, in looking at these stocks, I looked at the year-to-date performance figures listed in the Wall Street Journal and chose stocks that had performed well since January 1st. Finally, I made it a point not to choose stocks in any company for which I have previously been employed. There are emotional connections there that might cloud my rationality.

2. What is the Beta of your portfolio? (Include the calculation.) Did your portfolio behave as Beta would have predicted?

ß_Portfolio = (W_AET × ß_AET) + (W_BKS × ß_BKS) + (W_MOT × ß_MOT) + (W_SWY × ß_SWY) + (W_LMT × ß_LMT)
ß_Portfolio = (19.94% × 0.95) + (20.05% × 0.95) + (19.96% × 1.30) + (19.82% × 0.90) + (20.23% × 0.70)
ß_Portfolio = 0.96

This Beta rating would tend to suggest that my portfolio would be slightly less volatile than the market. Given that the market experienced a gain of 3.19% over the past nine weeks, and that my portfolio gained 5.51% over the same period, I would have to say that my portfolio performed better than predicted by the Beta rating.

3. Did you beat the market on a risk-adjusted basis? (Include the calculation.)
The 3-month T-bill rate quoted in the 1 August 2005 issue of the Wall Street Journal is 3.38%. All other figures are as listed above.

Alpha = R_p - (R_f + ß × (R_m - R_f) )
Alpha = 5.51 - (3.38 + 0.96 × (3.19 - 3.38) )
Alpha = 2.31

This answer suggests that I did better than the market on a risk-adjusted basis. This makes sense, since I had a portfolio that was less risky than the market and still experienced a higher growth rate.

4. What did you learn, and what would you do differently given your new knowledge?
The main thing I learned from this class is how complex the financial world can be. When I chose my stocks, I used only very rudimentary criteria to choose stocks that I felt might perform well. I did very little research and looked only at a few easily accessible numbers. I've learned that a lot of research and calculation goes into having a successful portfolio. If I were doing it today, I would do a lot more research. I would look at financial statements, long-term past performance, and industry trends to choose my stocks. Still, having gained over five per cent in just over two months, I feel very comfortable with how this portfolio has turned out.