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Team Project I: Dow Jones index fund

Assigned date: August 30, 1999

Due date: October 12, 1999


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.


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.


  1. 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.
  2. 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.
  3. 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.
  4. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.