The Stock Trial - Investment Strategies - Methodology & Fundamental Analysis

The purpose of our portfolio is to collectively manage a mock $1,000,000 portfolio during the fall semester of 2012. Our statement summarizes how we invested the mock money in a variety of stocks. We will define the investment objectives, strategies, and risks associated with this portfolio in order to summarize how the portfolio was constructed.

Investment Objectives:

Our objective for the stock trial is to passively seek short-term capital appreciation of our portfolio over the three months in order to outperform the market. The portfolio will be adjusted throughout the time period in order to avoid overall risk that could cause dramatic drops in our purchasing power. The goal is to achieve a high total return and to try to beat the chosen benchmark, the S&P 500 and Wilshire 5000 index.

Investment Strategies:

Our investment strategies are to maximize total returns and have an average rate of return greater than the benchmark index. One strategy employed was market timing in order to maximum the portfolio returns. The market timing strategy is used to attempt to make future predictions about market price fluctuations and patterns based on information about current market conditions. It assists with making buying and selling decisions of financial assets, and by identifying patterns it will allow us to find opportunities for profitable future expenditures and to avoid assets that will cause future losses. We've also decided to place certain restrictions on our investment styles in hopes of developing a stricter strategy we could stick with throughout the process. We decided that no more than 50% of our portfolio could be comprised of a single asset. This was to ensure diversification. We restricted any investments on long-term assets, such as real estate and collectibles, due to the short time frame of the simulation trial. We would only invest in stocks that could be traded on short-term notice. We also wanted to avoid bearing excessive risk, so we wanted to develop a strong risk aversion strategy. As the market and assets in our portfolio fluctuate over the three months, changes would have to be made to some of our investments.

II. Methodology & Fundamental Analysis

Once our objectives and strategies were established we were able to begin our decision making for the best possible investments to create our portfolio. The large portion of our investments was in securities. In order to keep our portfolio diversified and avoid idiosyncratic risk we attempted to buy securities of companies that were not in the same sector. We bought some securities in the tech sector and pharmaceutical sector. In addition we bought securities in the retail sector and several other unrelated sectors of the economy. Once we had made investments we would then watch how these holdings would perform. Typically after a three week period, if we noticed a particular security previously purchased was having a consistent downward trend we would sell all shares of the asset to avoid future losses. If we noticed a security was having an upward trend we would buy more shares in hopes of continued price increases so that we could sell at a later date for greater profits.

Concerning purchasing and selling shares, we placed stop orders on riskier assets since we felt they had the potential to cause significant losses if they were to go in the opposite direction of which we hoped they would. We shorted some stocks hoping they would experience price decreases so that we could profit off of this future expectation once we bought them back at a later date. Our decision making for our investments were not completely insightful due to a lack of complete knowledge about each and every individual asset available to invest in and on techniques we could utilize to find the best potential investments. Using market timing and trying to identify patterns were the key factors in our methodology, which are both used in fundamental analysis.

We tried to use fundamental analysis when creating our portfolio. Fundamental analysis considers the outlook on the overall company behind a stock. It takes into consideration market and economic conditions that subsequently affect a company's revenue growth, ability to make profit, and debt repayment potential. There are many important factors to consider, but the most important indicator may be a company's revenue growth overtime. A company with growing revenue suggests a strong company, and we wanted to invest in companies that had a revenue growth percentage

...