4/27/2015 Portfolio for Risk Tolerant InvestorsAn Intriguing Trading Experience Abstract The six-week trading began with a thorough investigation of the companies that showed a steady growth over a long period. Factors that determined the growth were analyzed and informed investment decisions were executed to reflect the market conditions. Investment strategies were devised for optimum capital growth and knowledge was gained throughout the trading period as to how investors can manage risk through various trading strategies. Power to analyze companies with consistent substantial margins and ability to invest in them enabled understanding of timely decision enhancement techniques for future investments.Portfolio for Risk Tolerance InvestorsAn Intriguing Trading Experience Introduction: Briefly describe the following. What have accomplished in the project? What are your investment goals, your investment benchmark, and trading strategy? How did your fund perform relative to the market? Specify some main performance metrics, such as the Sharpe ratio. At the end of your Introduction, briefly lay out the organization of the remaining part of your report. The Fund The idea is to replicate Warren Buffet’s half a century famous Berkshire Hathaway’s investing strategy. Berkshire Hathaway Inc. is the fifth largest company in the world. It is a well-diversified company, an American multinational conglomerate, that owns (in full or significant percentage) insurance companies, pharmaceuticals, food, jewelry, international, jets, newspaper, electric, gas, and more and acts like an index itself. The four largest investments are Wells Fargo & Co., Coca-Cola Co., International Business Machines Corp. and American Express Co., which Berkshire Hathaway owns 9%, 9%, 6% and 14% of, respectively, making Berkshire Hathaway the largest investor in each. Recently, Berkshire Hathaway has invested in undervalued companies such as General Motors Co., Verizon Communications Inc., Suncor Energy Inc., and more and joined Prudential Bridgeport Realtors. Based on the company’s net income increase year after year, and by consistent substantial margins, we continued to believe that investing in Berkshire Hathaway class A stocks would be a good investment strategy. The start-up fund was initially invested in Warren Buffet’s Berkshire Hathaway stock, which is considered as the foremost business strategy as a mutual fund in investing. However, the goal was not to construct a 100% risky portfolio, hence the fund was invested in a managed mix of 60% stocks and 40% fixed income securities under normal circumstances. The main holdings of our fund include companies such as Health Net Inc.- a health care service company (HNT), White Petroleum Corp. and Oasis Petroleum Inc. (OAS & WLL), PIFCO ETF- fixed securities (BOND), Berkshire Hathaway (BRK A), and Church & Dwight Co.- a manufacturing company (CHD). Efforts were taken to include securities from both large and small market.

1. 4/27/2015
Portfolio for Risk Tolerant InvestorsAn Intriguing Trading
Experience
Abstract
The six-week trading began with a thorough investigation of the
companies that showed a steady growth over a long period.
Factors that determined the growth were analyzed and informed
investment decisions were executed to reflect the market
conditions. Investment strategies were devised for optimum
capital growth and knowledge was gained throughout the
trading period as to how investors can manage risk through
various trading strategies. Power to analyze companies with
consistent substantial margins and ability to invest in them
enabled understanding of timely decision enhancement
techniques for future investments.Portfolio for Risk Tolerance
InvestorsAn Intriguing Trading Experience
Introduction:
Briefly describe the following. What have accomplished in the
project? What are your investment goals, your investment
benchmark, and trading strategy? How did your fund perform
relative to the market? Specify some main performance metrics,
such as the Sharpe ratio. At the end of your Introduction,
briefly lay out the organization of the remaining part of your
report. The Fund
The idea is to replicate Warren Buffet’s half a century famous
Berkshire Hathaway’s investing strategy. Berkshire Hathaway
Inc. is the fifth largest company in the world. It is a well-
diversified company, an American multinational conglomerate,
that owns (in full or significant percentage) insurance

2. companies, pharmaceuticals, food, jewelry, international, jets,
newspaper, electric, gas, and more and acts like an index itself.
The four largest investments are Wells Fargo & Co., Coca-Cola
Co., International Business Machines Corp. and American
Express Co., which Berkshire Hathaway owns 9%, 9%, 6% and
14% of, respectively, making Berkshire Hathaway the largest
investor in each.
Recently, Berkshire Hathaway has invested in undervalued
companies such as General Motors Co., Verizon
Communications Inc., Suncor Energy Inc., and more and joined
Prudential Bridgeport Realtors. Based on the company’s net
income increase year after year, and by consistent substantial
margins, we continued to believe that investing in Berkshire
Hathaway class A stocks would be a good investment strategy.
The start-up fund was initially invested in Warren Buffet’s
Berkshire Hathaway stock, which is considered as the foremost
business strategy as a mutual fund in investing.
However, the goal was not to construct a 100% risky portfolio,
hence the fund was invested in a managed mix of 60% stocks
and 40% fixed income securities under normal circumstances.
The main holdings of our fund include companies such as
Health Net Inc.- a health care service company (HNT), White
Petroleum Corp. and Oasis Petroleum Inc. (OAS & WLL),
PIFCO ETF- fixed securities (BOND), Berkshire Hathaway
(BRK A), and Church & Dwight Co.- a manufacturing company
(CHD). Efforts were taken to include securities from both large
and small market cap to understand the impact of new
information.
Consideration for these stocks is primarily because Berkshire
has outperformed the S&P 500 for the past five years with a low
beta than the S&P index. In addition to large market cap of
approximately 353B, Berkshire class A shares sell for more than
218K because they have not had a stock split since Warren
Buffet took over the company. All the earning have been
retained and no dividends are paid out, but this has caused to

3. reduce the liquidity of the stocks in the market.
In addition, beta measure is a good risk assessment tool for
short-term trading periods. The beta of BRK (.51), PIFCO ETF9
(-.07), CHD (.46), and HNT (.86) are below 1 and hence less
volatile in price than the market. However, the other two
investments in oil and petroleum companies, OAS and WLL
have a beta of 1.91 and 2 each and are exposed to high price
volatility. A diversified portfolio with more investments with
low beta values, that project less risk and two risky investments
for higher returns was thus created. (include beta, sharpe ratio
of PF) However, one disadvantage to relying on beta is that it
does not include any new information.
On March 26th Kraft foods crafted a deal with H.J. Heinz Co.
that had Warren Buffet’s Berkshire Hathaway as their largest
shareholder holding a 25% stake. This caused the price
valuation to increase immediately, but within days the stock
prices were effected due to information such as predatory loan
practices at Clayton Homes, the nation’s largest producer and
financier of manufactured homes, which is owned by Berkshire
Hathaway. In addition, Berkshire’s liquidation of all its stake in
POSCO, a Korean steel maker company, had a negative impact
on BRK stock prices. More than halfway into our trading
period, Berkshire Hathaway Inc. (BRK-A) performed above
average with a weekly performance of 0.48% moving forward
with a quarterly performance of -3.00% and a 52 week low of
19.65%. Market timing was one of our strategies to buy and sell
stocks and decisions were made based on future price
predictions and fundamental analysis.
Unfortunately, Berkshire Hathaway was the major loser that
degraded the overall returns of the portfolio. The daily negative
returns had a significant impact. The S&P 500 index and BRK
stocks were closely positively correlated in the beginning of the
trading period. Although we made a profit of .003% by short
selling the securities in the beginning, we later encountered that

4. the number of short seller against Berkshire increased
predicting a fall in prices. We short sold the shares to prevent
further loss by placing stop loss order at 217K. Due to simulator
rules, a time delay of 15 minutes also contributed to lower
returns on 25% of the fund. However, after the major events in
the Berkshire’s Inc., the amount of correlation decreased
between the market and BRK, thus becoming our portfolios
major loser. (Before and During the Trading Period- Table 1)
On the other hand, major winners (Table 2) include two small
cap firms Oasis Petroleum Inc. (OAS) with the market cap less
than 2B and PIMCO ETF (BOND) with a market cap less than
11B. The total returns on each of these winner investment
securities were 30% and .27% respectively. Market timing
strategy had been implemented to decide if the stocks should be
sold or held longer based on new information and predictions
for positive returns. For example: OAS had been held
throughout the trading period for total returns of more than
30%. On March 25th, two days after our market order buy of
15000 shares, increase in oil prices due to euro strengthening
against the dollar resulted with OAS stock price to increase by
1.21%. In addition OAS has priced an upsized underwritten
public offering of 32,000,000 shares of common stock for total
gross proceeds of approximately $409.6 million. With a 30 day
option to buy these stocks, the price increase by .68%. The
decision to hold the security was firm when about 16 analysts
agreed that the stock price would reach $ 18.13 in the short term
with a deviation of $3.52.
Though not significant profits were made, about .003% return
on Berkshire Hathaway, a large cap firm, was achieved by short
selling them when the market started falling due to firm risk.
Time delay of 15 minutes had a significant impact when short
selling and market buy orders for BRK with a high P/E ratio
17.82. Holding BOND and OAS had resulted with an average
return of 22%. However, OAS with lower P/E of 3.28 (BOND
has no P/E value) did not help for higher returns even with 30%
increase in its total returns.

5. you can use this part in the intro as answering trading strategy
Q.
Trading strategy-
Our core investment strategy is to replicate Warren Buffet’s
Berkshire Hathaway class A securities, which are diverse, has
higher revenue, and makes attractive investments with an
aggressive potential to expand. Similar to Buffet’s dogma, our
benchmark is S&P 500 and repeatedly BRK has outperformed
S&P 500 with an astonishing return of 693,518% from 1964 to
2013. We implement other strategies as market timing and
technical analysis to maximize expected returns and to minimize
risks.
Appended Tables
Table 1: Major Looser: Before and During the Trading Period;
S&P 500 vs BRK
Table 2: Major Winner: OAS vs S&P 500
OAS: More than 30% increase in returns
PIMCO ETF Trust (BOND): .27% increase in returns
Portfolio Management Project
An Intriguing Trading Experience
Four investment analysts manage a mock portfolio worth
$1,000,000 with a margin of $1,000,000. Interesting strategies
are implemented within a short time frame of six weeks for
capital appreciation with prudent approach to protect capital

6. from undue risks.
1 SHAPE * MERGEFORMAT
Portfolio Management Project
FNAN 311 is designed to provide students with an introduction
to modern portfolio management and asset valuation. Through
this course, students will gain a systematic understanding of
financial markets, the various types of financial instruments,
and the main investment theories. The group project provides
students an opportunity to apply modern investment strategies
and risk management tools to near real-world portfolio
management without real-world risk. Students are required to
design a trading strategy (including security selection),
implement the strategy (execute the trades), and evaluate the
performance of the portfolio. The trading platform for the
project is the Virtual Stock Exchange at
http://vse.marketwatch.com (or
http://www.marketwatch.com/game/finance311spring2015)
The Scenario
You are beginning your new job with Patriot Investment
Strategies, a mutual fund family managing approximately $50
billion in assets. Patriot has a variety of funds with various
objectives. You and several new associates, as a group, have
been asked by management to create and manage a new fund
based on your own ideas, benchmarking the performance of the
fund against an existing index. You have learned that the other

7. forty new associates at Patriot have received similar
assignments, and that the performance of each fund will be
evaluated by management six weeks after the inception of each
fund. Management has indicated that, although, the fund’s total
return as measured against the chosen benchmark is certainly
important, due to the short time horizon, the novelty and
effectiveness of your investment strategy may be even more
important in making you standout as the next star money
manager of the firm (and the recipient of the biggest year-end
bonus).
Trading Period: February 18, 2015 to April 13, 2015, seven
weeks of trading.
Grading
The project represents 20% of the final course grade. Out of 20
points, 10 points will be assigned to the final report submitted;
10 points will be assigned to the in-class presentation (20 min
for each group).
Fund Prospectus (before trading starts, for your own group):
The fund prospectus is intended for prospective investors and
outlines your investment plan. Your prospectus should answer
the following questions. What is your goal for this fund? What
strategy will you employ? What is your benchmark? Why?
Consult a real mutual fund prospectus to have an idea on
presentation and what to include. After reading your
prospectus, investors will decide whether they should invest in
your fund.
Final Project Report (10%):Due April 27, 2015 in class in hard
copy and electronic copies sent to me as well. This report will
be sent to your investors at the end of the investment period and
will give them a summary of the fund performance. Investors
want to know how the fund has performed compared to your
initial plan. After reading your report, investors will decided
whether they should continue to invest in your fund or should
they change the amount of funds they put in your group. Your

8. report should be within 6 pages, double-spaced (consult a
mutual fund year-end report for a general idea of what to
include). You may append tables and figures (no more than 5
additional pages) at the end of the report as supporting
documents. Your name must appear in the cover page to receive
credit.
Presentation (10%): Fund managers often give presentations to
major investors about their fund performance, and answer
questions the investors may have. To mimic this situation, each
group will give a 15 to 20 minute presentation of their fund to
the whole class. Every member of the group will participate in
the presentation. Members of other groups, acting as the major
investors, should ask questions and evaluate the presentation.
You may use either a PowerPoint slide show or transparencies
in your presentation. Presentation slides are due April 27th,
2015 in electronic format, when presentations are held in class.
Your name must appear on the first slide and you must
participate to receive credit.
Peer Evaluation: Within the same group, each member’s
contribution may differ. To account for this, each member is
required to file a peer-evaluation for the other members within
the same group. This peer-evaluation will be taken into
consideration in determining each individual’s grade.
Rules:
1. You will manage $1,000,000 in one portfolio. Short selling
and buying on margin are allowed. Remember that the current
maximum margin is 50%. Thus, your allowable buying power is
$2,000,000!
2. When you place an order, you will be charged a commission
fee. Although you are allowed to re-balance your portfolio as
frequently as you desire, bear in mind that transaction costs can
add up and lower your performance. On the other hand, this is a
good opportunity to test any day-trading strategies.
3. You are allowed to place (and are encouraged to try out)
different types of orders: market orders, limit orders, stop-loss

9. orders, etc. [The commission fees may differ for different kinds
of orders and securities.]
4. You must confirm each order to complete any transaction.
Academic Honor Code: Group members are permitted and
courage to communicate within each group about the project.
Group members CANNOT communicate the project with
members of another group. Plagiarism will not be tolerated
under any circumstances.
How to start with the Virtual Stock Exchange?
1. Please go to http://vse.marketwatch.com
2. On the left hand side tab, choose and click “Find a Game to
Join”
3. Enter our game id: finance311spring2015, and the game
should appear. If this is your first time logging into this
website, your will need to register first, so please follow the
instructions. Later, you may log in directly.
4. You still need a password for this private game. The
password is “fnan311”. Then click “Join Game”.
5. Read the Game Rules carefully, as it specifies important
settings for the game including your initial cash amount, trade
commissions, etc.
How to Start Trading?
Before planning on your trading strategy, you should first think
about your own preferences. What is your investment goal – for
retirement or speculation with free cash? This will determine
how much risk you can tolerate. Do you want to diversify
across different geographic locations, sectors/industries, select
particular securities, market time?
Possible trading strategies:
1. Momentum strategy

10. 2. Post-earnings drift
3. IPO underpricing
4. IPO long-term underperformance
5. Following insider transactions
6. Takeover target premiums (merger arbitrage)
7. Mad Money
8. Contrarian strategy (Buffet analysis)
9. Value Line recommendations, and other investment
newsletters
10. Macroeconomic fundamental analysis
You may apply any of the strategies above (and many more);
and you are encouraged to discover and implement new
strategies.
Where to find individual company information? You may use
the Bloomberg terminal to retrieve useful information on
individual securities and portfolios.
Online information sources include: finance.yahoo.com, SEC
online filing (EDGAR), and many financial papers.
Guidelines for Preparing the Final Report:
Here are some suggestions regarding your final project report.
The report can include the following parts:
1. Cover page: Title, authors, date, etc.
2. Abstract: A short paragraph summarizing the main points of
the report (fewer than 100 words).
3. Introduction: Briefly describe the following. What have
accomplished in the project? What are your investment goals,
your investment benchmark, and trading strategy? How did
your fund perform relative to the market? Specify some main
performance metrics, such as the Sharpe ratio. At the end of
your Introduction, briefly lay out the organization of the
remaining part of your report.
4. The Fund: Describe in detail your investment strategy and
why you chose this particular strategy for your fund. What are
the main holdings in your fund? Why did you choose these

11. securities? Which are the major winners and the major losers?
Did you make profit by long or short positions? What kind of
orders did you place (e.g. market orders, limit orders)? You
may append tables to present your results and facilitate your
discussion, and refer to the appended tables in the text.
5. Performance Evaluation: In this part you discuss the rate of
return of your fund over the investment period. How does it
compare with the market, and the other groups? You may plot
returns in a graph for ease of comparison. How risky is your
fund – the beta and the volatility. What are the performance
metrics of your fund, including the Sharpe ratio and Treynor
measure? You may append tables to present your regression
analysis and summary statistics.
You may further interpret the empirical results and discuss their
implications. What have you done correctly and what would
you change in managing your fund? If your strategy did not
perform as you expected in the investment period, you would
want to discuss why. Or, if you believe the results do not fully
reflect the effectiveness of your strategy, explain why you think
so. If you have many securities in your portfolio, you can
choose to focus on a select few to discuss in detail.
6. Conclusion and Discussions: Summarize the main points of
your report. What have you learned from the fund management
performance evaluation?