Stock Trak Report

Stock Trak Trading Game

David Cruz, Nathan DeMeo, Nicholas Hausauer, Thomas Keitel, Joshua Leible
11/25/2014
User ID: slufinance363
Professor Doellman

At the beginning of the Stock Trak assignment, we had a rather naive investment
approach, investing solely in companies that were familiar to us. Throughout the duration of the
assignment, as investing strategies were discussed in class, our group began to take more of an
academic approach in regard to our investment strategy. We began to not only rely on news
articles but we also analyzed company financials, giving us a better picture of the company as a
whole. Investing in such a short period of time doesnt allow for much growth other than
immediate price change due to urgent company news, especially when following a passive
strategy such as the one we employed. Although our analysis of companies is advancing, there is
still much room for improvement; this can be seen throughout our investment horizon where the
market beat our portfolio consistently.
During our investment horizon the market plunged during mid-October. This dip in the
market can be contributed to several factors, including: uncertainty with the Federal Reserve, the
Ebola outbreak, as well as uncertainty in the market from slow economic growth since the
recession. However the market was able to recover from this setback and end our investment
horizon with a slight positive return around 3%. Our portfolio was significantly correlated with
the market as can be seen from the graph below, although at the end of the investment horizon
our portfolio came up short of the markets return.
While reviewing the sectors to invest in, it was observed that the pharmaceutical sector
was consistently beating the market. While analyzing potential companies to invest in within
this sector, we took into account the medication provided by each company. With a large and
growing trend of type 2 diabetes within the United States, as well as increased obesity, we
decided to invest in an insulin provider. Directly before purchasing Novo Nordisk (NVO) we
were informed that they had pending FDA approval for a new drug they were developing
(Saxenda). After purchasing and holding the stock, NVO received the FDA approval, causing
the price to jump. However by the last day of trading, the gain that we had seen previously was
lost, the majority of which was lost during the drop in the market in October. During our
investment period, NVO also decided to exclusively focus research and medication for diabetes.
In doing so, NVO cut all R&D expenses for inflammatory diseases and used the savings to
construct a new research facility exclusively for diabetes
When initially searching stocks, we found that Abengoas (ABGB) price had increased
consistently since its IPO in June and had tripled in value and we thought that this trend would
continue as the company continued to be profitable and win large projects in Europe;
additionally, with the volatility of gas prices, we figured that a solar energy company could
offset some of the risks of other stocks. One issue we found with this stock was rampant short
selling in the Spanish market which greatly reduced the value of the stock. The most significant
news story occurred on November 12th when shareholders sold the stock in mass due to the way
they were accounting their net debt. The result of these fears was the value of the stock

plummeted 36.5% in one day and due to the scope of the project we were never able to realize
Abengoas swift recovery afterwards.
After investigating various technology stocks we found Microsoft Corporation has had a
steady gain in the past year boosted by new products such as the Xbox One and Surface Pro 3.
One event significantly impacted Microsofts returns specifically, their acquisition of Mojang
AB for 2.5 billion dollars on September 15, 2014. Mojang is the creator of the popular game
Minecraft which is well-known for its widespread community. After receiving this information
we bought stock in Microsoft and it soon reached a year-long high on September 19 at $47.52,
and decreased for the next month. By October 16 Microsoft dipped to a three-month low of
$42.74 per share. This reflects the inability for beginner investors like us, to take advantage of
the opportunities provided by news stories as soon as they come out. Despite this decrease we
held our stocks in Microsoft and were later rewarded by an increase in stock price, especially
after the release of their first quarter earnings which showed record first quarter revenue. The
Microsoft stock reached a new high of $49.61 by November 13th and we were able to realize a
small amount of returns.
In early September, Apple announced it will soon be releasing the iPhone 6, iOS 8, the
Apple Watch, as well as other products and services. Taking this news release and anticipated
increased sales and demand for Apple products and services, an investment opportunity surfaced.
After additional research, we decided investing in Apple before these new products were
released would allow for potential and probably capital appreciation and gain. After the release
date, there was a certain time period where our investment in Apple dipped down into negative
returns. This was correlated with the markets negative cumulative returns. That being said, we
still questioned our initial investment decision because of Apples negative cumulative returns
(at one point). However, we decided the potential for our investment was still profitable. Thus,
we decided to stick with this investment decision in the long-run. Eventually, as the market
started turning around, Apples returns started increasing. In the end, our investment in Apple
turned out to be our second most profitable decision with an ending return of 14.60%.
At the onset of the trading period we observed that current macroeconomic conditions
still lent itself towards companies that catered towards serving the needs of lower income
individuals who were still recovering financially from the financial crisis of 2008. Of these
companies two stood out: Dollar Tree (DLTR) and Dollar General (DG). Both companies were
attempting to take over Family Dollar (FDO), another discount goods store. A successful
takeover by one of these corporations would mean an expanded retail base and a larger growth
opportunity. After further research we decided to invest in Dollar Tree, as it seemed to have a
better opportunity of successfully buying out Family Dollar. Over the course of our investment
horizon a Family Dollar buyout by either company has not been resolved, however due in part to
current macroeconomic conditions Dollar Tree maintained a steady growth in company value

over the course of the project, and we decided to keep an ownership position in the company
over the duration of the project.
Yahoos (YHOO) stock was another big winner for our portfolio. When our initial stock
search began, Alibaba was about to have their IPO and because Yahoo owned 22.4% stake in
Alibaba, we felt that this IPO could offer us tremendous benefits at a much lower price than if
we had purchased Alibaba stocks directly. Alibabas stock performance surpassed expectations
and the result was the value of both Alibaba and Yahoos stocks skyrocketing. While many of
our other stocks in our portfolio seemed to perform in-line with the market, Yahoo saw an initial
dip, but then a consistent surge in price that continues to be the trend. Furthermore, we discussed
in class the stock prices can be affected by some sort of market momentum and this could
certainly be argued for Yahoos stock, who despite a downturn in the economy, was able to
provide consistently high returns and positively affect our portfolios return.
After completing the Stock Trak assignment and receiving a negative return, we believe
that going forward it is important to have an active role in managing future portfolios. Essentially
with the portfolio constructed for the purpose of this assignment, we researched the companies
that we believed would generate a positive return and we sat on these stocks until the last trading
day. It would have been more advantageous for our portfolio if we actively watched the news for
these companies and pulled out our investments in times of severe drops, such as those that were
experienced in mid-October. After the price drops these securities could be repurchased at a
point when the prices were at the bottom of their fall. Also, using models learned in class such
as the CAPM equation, as well as the ORP equation would have contributed to earning higher
returns than we experienced from our passive strategy. However, with the constraint set on
investing time we were not able to generate the returns expected.
In addition to managing our portfolio more actively, some early investment decisions
may have been based on information that is not necessarily always indicative of future, profitable
gains. For example, from class and the textbook we learned that past historical prices and returns
do not accurately picture a painting of future returns. Early in the semester, we invested in BHP,
a mining company based in the Midwest. The decision to take on this investment was based on
analyzing the company and its fluctuations with the market. That being said, we mainly decided
to invest in BHP based off historical prices and return fluctuations. We analyzed how BHPs
stock fluctuated almost every three months. We purchased BHP at what we thought would be a
low-point of this fluctuating roller coaster. Unfortunately, instead of turning back around, BHPs
stock continued to decrease and decrease. Looking back at the project, our investment decision
should have been based off more than simply looking at past performance. This was an important
lesson learned throughout the semester.

Performance Measure

Portfolio Fund S&P 500 Index

Starting Value (9/3/2014)

$100,000.00

$2,000.72

Ending Value (11/19/2014)

$99,883.88

$2,048.72

Holding Period Return (%)

-19.80%

-12.99%

Average Weekly Return

(%)(unannualized)

-1.79%

-1.13%

Standard deviation (%)(unannualized)

2.65%

2.36%

Average Return (%)(anualized)

-7.52%

-4.79%

Standard Deviation (%)(annualized)

19.12%

17.05%

Beta from excess return regression

1.011571368

-0.6890

-0.5482

-0.0180544190

-0.01152167842

Sharpe Ratio (unnanualized)

Treynor Measure (unnanualized)
Jensen's alpha (unnanualized)

-0.647342%