• Learn how to analyze stocks in order to make investment decisions
• Acquire the ability to qualify and quantify investment decisions using machine
• Practice writing investment thesis
• Learn how to place a trade
• Learn how to collect investment data
• Learn how to analyze portfolio investment performance
Project Overview and Goals
Acting as a prospective portfolio manager, your potential clients have entrusted you with
$1,000,000 to invest at your discretion. They are expecting you to invest their money wisely
and profitably. While your clients desire a high rate of return, their tolerance for risk is
Additionally, your prospective clients are considering other asset managers (your classmates)
and will be ranking each according to the success of their portfolio management. You will be
able to track how you are measuring up throughout this exercise.
At the end of the trading period, if your clients are satisfied with your performance managing
their portfolio, they will extend their relationship with you.
Specifically, they are concerned about the following criteria:
• Absolute return: The total dollar increase in the portfolio over the trading period
• Risk-adjusted return: The return on the portfolio taking into account the level of risk
assumed by you, as measured by the Sharpe Ratio
• Goal: create, evaluate, and manage an equity investment portfolio
• Start date: April 4, 2022
• End date: April 29, 2022
• Select between 10 and 20 stocks (long or short; not indexes) traded in US exchanges.
You can use any of the machine learning-based portfolio optimization or stock
selection methods that we study in this course. For instance, you can select stocks
according to the risk factor models calculated with machine learning algorithms or use
fundamental analysis using indicators such as the P/E ratio forecasted with machine
• Each position (long or short) must be between 5% and 10% of your assets. This
restriction does not apply to the index model. In this case, you can invest in the market
index and adjust the contribution of each asset according to the model’s
• Cash should not exceed 20% of your portfolio.
• Starting assets under management (AUM): $1,000,000
• Select a benchmark to evaluate your portfolio
• Since this is a simulation and not a real game, we ignore bid/ask spreads, and
transaction costs (although they could be about $10 per trade).
• Set up your portfolio at your paper account of interactivebrokers.com.
• The simulation should finish on the “end date”, and you should define your portfolio
by the “start date” defined above. You can use the period before the simulation starts
to evaluate different portfolios and get familiar with the system. After the “start date”,
you can still rebalance your portfolio or modify your strategy. However, in this report,
you must include a sound financial and methodological explanation of any changes to
your portfolio optimization method.
Investment performance file (weekly):
You must submit a weekly update of an excel file that contains the following information
about your portfolio: holdings (tickers) including cash, number of shares, trade price, close
price, previous close price, value and weight in the portfolio for each holding, total AUM,
AUM daily change (profit/loss) in dollars and percentages, cumulative return for portfolio
(value and rate), benchmark value, benchmark daily change in dollars and percentages,
cumulative return for the benchmark. All calculations must be shown with formulas, no hard
You should submit this file as an answer to this assignment in Canvas. Every week, you
should update the file including the results of every week below the existent results. At the
end of the exercise, it should have the daily returns of the portfolio and benchmark during the
The final report should include:
I. Relevant sections of the Policy Statement (see CFA, Elements of An Investment
Policy Statement for Individual Investors: https://www.cfainstitute.org/-
1. Scope and Purpose
1. 1a. Define the context: A preamble is often useful to relate information about
the investor and/or the source of wealth as a way of establishing the context in
which an investment program will be implemented.
2. 1b. Define the investor
2. Investment, Return, and Risk Objectives
1. Describe overall investment objective
2. State return, distribution, and risk requirements
3. Determine the risk tolerance of the investor
4. Describe relevant constraints
5. Describe other relevant considerations
II. Describe why you invested in a company – provide concrete qualitative and
Describe reason and timing for entry and exit and the evolution of your portfolio
Discuss portfolio performance including tables with the following statistics and
o Portfolio and benchmark statistics (for the entire holding period):
cumulative (total and annualized) returns, volatility (total and annualized),
Sharpe ratio (annualized), alpha, beta, Active Return (excess return),
Active Risk (standard deviation of the tracking error), Information Ratio,
correlation to benchmark.
o Performance attribution (asset allocation vs stock selection)
o Provide factor style analysis using Fama French three factors (or add
Carhart fourth factor or use Fama French five factor model). Fama French
factor data can be downloaded at
Please address the following:
• Which positions exceeded your expectations? What conditions caused this?
• Which positions underperformed for you? What factors created the performance gap?
• What are the key things you learned from your trading simulation?
• How will your trading simulation influence your personal investing in the future?
The report should be self-contained, so it should answer all the questions and include all the
tables. However, all these tables should also be submitted in an Excel file with all the
formulas and calculations, no hard coding.
• Include your self-evaluation (grade that you deserve) with an explanation based on the
Investment rationale 30%
Data coherence 30%
IMPORTANT: The report should discuss the returns obtained, the investment rationale, and
Final submission includes these files (25% points are reduced for any missing file):
Report on Word or pdf,
Excel file with all the tables and calculations that are already included in the report.
Show all calculations/formulas, no hard coded numbers in the spreadsheet.
Python notebook as a pdf or html file with your portfolio optimization calculations.
Python code file of your notebook as an independent file.
If you want to write your complete report on a Python notebook that includes all the
calculations, graphs and answers, you can submit your notebook, spreadsheet and python file.
Extra 2 points: if you do all the calculations of the spreadsheet, and portfolio
optimization, and include all the answers in a Python notebook, you can submit only the
notebook and Python file.
Sources of Information for Portfolio Managers
Sources that you may find to be particularly valuable for your research include:
Wall Street Journal: www.wsj.com
Financial Times: ft.com
Yahoo Finance: finance.yahoo.com
Daily Treasury Yield Curve Rates: http://www.treasury.gov/resource-center/data-chartcenter/interest-rates/Pages/TextView.aspx?data=yield