Team Project I: Dow Jones index fund
Assigned date: August 30, 1999
Due date: October 12, 1999
Descriptions:
Three to four students form a team to create a index fund with no more than
five individual stocks selected from the 30 Dow
component companies. For the list of the 30 companies, check http://moneyaction.com/stocks/dj.htm.
Your performance will be measured by how closely your fund behaves to the Dow
Jones Industrial (DJI) Index, rather than the return of the fund.
Methodology:
Collect last five years weekly stock closing prices of the 30 companies from http://finance.yahoo.com .
Using the first
three years data to determine the stocks to be included in the portfolio and
their weights in the portfolio. At this point, you should assume no knowledge of
the last two years stock market performance. Once the portfolio is
created, evaluate the portfolio performance in terms of its correlation with the
fluctuation of DJI index. In addition, calculate the expected return
(average return) and expected risk for both the portfolio and the index.
Assume the fund has $1,000,000 at the beginning of the two year period and no
trading is allowed during the two-year period for simplicity reason.
Once you obtain the above result, allow yourselves to make a trade every six
months or 12 months and see how it affect the correlation, expected return, and
risks.
Evaluations:
- The key success factor for this project is to demonstrate a systematic
approach to choose and trade the stocks because an index fund is run by
computer programs that follow a certain set of decision rules. In
addition, you should explain the rationale of adopting each decision rule.
- A typed, double-spaced paper that documents your endeavor in creating a
successful index fund. The paper should be written in a professional
manner. It should at least contain an introduction, a
section describing your methodology, a conclusion section that
summarizes the result of your portfolio, and some insightful observations
from the dataset. All detailed derivations of formulas or numbers
should be put in Appendix so that you can keep your main paper clear.
All cited work must have its sources listed in the reference list.
- Each student should keep a log on what you have been assigned to do and
what you have accomplished. The best way to do so is to have all
communication done on Web Board so that I can monitor your progress and give
you advises as needed. At the same time, a log is always kept there.
- Peer evaluation: At the end of each project, you will evaluate your team
members' contribution in a scale from 1 to 5 with 1 being the least
satisfactory performance. Unless a student is rated consistently and
significantly below other team member, all team members receive the same
credits for the project. If a significant discrepancy exists, low
performer receives a discounted grade.
Steps and progress:
- By 2/9, you should have the historical time series for the 30 stocks and
DJI index arranged in a spreadsheet and convert the closing prices into
weekly percentage changes.
- By 2/16, you should have the correlation matrix of the 31 times series
calculated and five or less stocks picked based on certain rules.
- By 2/23, you should have evaluated the portfolio performance in terms of
its correlation with DJI index and the overall expected return and expected
risk in the two-year period assuming no trade allowed in the two year
period.
- By 3/8, you should have written up the majority of the paper and added
the option that allows you to trade once every 6 months.
- Final touches are added during the last week before due date (3/16). Note
that the first test is scheduled on the same date. In this test, the
technique used in the project will be included.
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