1. Portfolio Game Each student in the class will enroll and participate in a portfolio simulation game. The rules and requirements for this exercise are listed at the end of the syllabus. This portion of the course is worth 15% of the final grade.

2. Portfolio Simulation Game Game begins with the second week of the course and ends 13 weeks later. – For TAP students this means it continues through the concentration courses. – For the first course, the trades are restricted to equity investments. After the first course all the available investment assets of the game are available. The rules are fairly simple. You are going to build a portfolio. You have an initial amount of $100,000. You must make a minimum of 3 trades per week and submit a report explaining the rationale for the action. – You cannot invest more than 10% of your money in any one company.

3. Game grading: Pre-game strategy paper (due week 2) 12% Performance30% Weekly reports (4)28% End of game report and discussion30%

4. Weekly Game Reports Discuss the trades of the week – Prepare current portfolio beginning and ending values for each investment. – Use the word document template for the format – Include in the rationale for the trade. Note: have to sell, need a trade, etc are not valid reasons You must provide information about why you are doing the transaction.

5. Game Performance The top performing portfolio will receive 100%, 2nd place 95%, 3rd place 90%, and all others 85%. – 50% real returns; 50% sharpe ratio I will also be playing the game as a passive investor (no trading). Anyone that outperforms the instructor’s portfolio receives a 5% bonus.

6. Pre-game strategy paper/report Prepare a short paper describing an investment strategy that you propose to follow. – It is understood that you may not have a solid understanding of what a strategy is. – It is also understood that this vision could change. This document should be 1 or 2 paragraphs. You should include what you hope to learn from such a game.

7. End of game report and presentation No formal presentation in this class We will discuss the following – How has your strategy changed – Any great revelations? – Performance so far? – Provide at least 2 graphs or illustrations of your progress Worst move? (do not name companies) Best move? (do not name companies) Short 2 page explanation of the above.

8. Getting Started in OTIS Setting Up an Initial Investment in OTIS

9. Wharton OTIS OTIS is a trading simulator that allows you to gain real world experience investing in various securities and managing a portfolio. In OTIS you “execute” buy and sell orders. The orders “clear” at actual market prices in real time (15 to 20 minute delay) with trading fees assessed. Analytical and performance sections permit you to analyze results.

10. Registration Process (continued) Go to www.aw-bc.com/wharton and click on the OTIS logo.www.aw-bc.com/wharton Next double click on the register button located under first time user. Follow screen instructions to register. – The instructor will supply a simulation number.

11. How to Use OTIS over the Course Beginning of the course – Invest in stocks based on your view of the economy and your risk / return preferences. – Try one or more of the following advanced features: margin trading, short selling, limit or stop orders. End of term – Assess investment strategy and performance over the term using OTIS performance and history sections.

12. Guidelines for Equity Purchases This portion of the portfolio may include direct or indirect purchase of stocks from the following categories: – U.S. and International Equities – Exchange Traded Funds and Equity Mutual Funds.

13. Guidelines for Fixed Income and Derivative Asset Purchases This portion of the portfolio may include any or all of the following: – Government Securities – Corporate Bonds and Bond Mutual Funds. – Futures and Option Contracts

14. Example OTIS Template –Domestic Stock Purchase OTIS Template:

15. Determine the Investment Objective As a “manager” you need to determine and state your primary goal. Common goals in investing are: – Preservation of capital (Avoid or minimize capital loss.) – Income generation (Earn regular income via interest and dividends) – Capital appreciation (Seek capital gains. Qualify as to how aggressively seek capital gain.)

16. Value and Growth Styles The value style of investing seeks to identify stocks that are currently undervalued in the market. Such stocks may be priced “below average” relative to some measure such as earnings, cash flow, or book value. The growth style emphasizes stocks that are likely to show relatively large and / or rapid price appreciation. Such stocks are thought to be reasonably priced given high expected earnings growth.

17. OTIS Power Point Slides Screening Tools for Stocks There are various screening tools available on financial web sites. For example, you can screen for mutual funds that are international. Or, you can screen for mutual funds that specialize in small capitalization stocks. Try screening using one of these tools. For example, on www.morningstar.com select tools and then Basic Screener. Then you are able to run a screen for either stocks or mutual funds.www.morningstar.com

18. OTIS Analytics The following items are some of the evaluation metrics found under the Analytics tab. Gain/Loss Report-Closed Positions. – Discuss reason / motivation for closing position. Gain/Loss Report-Open Positions. – Discuss major factors behind gains / losses to date on open positions. Portfolio Holdings Graph. – Especially helpful if sectors have been assigned. Select different dates to show changes in portfolio weights.

19. OTIS Performance Historical Rankings. – Check two or three dates to show volatility in performance over time. Analyze why portfolio has tended to return more or less than the benchmark or the class average. View Sharpe Ratio. – Assess your portfolio’s return relative to its risk as measured by the Sharp ratio. Portfolio Value and Portfolio Change Graph. – Analyze correlation /deviations between your portfolio and the benchmark or class average.

20. Note on the Sharpe Ratio The Sharpe ratio compares the excess return on your portfolio (relative to the risk free rate) to the risk of your portfolio as measured by the standard deviation of returns. The higher is the Sharpe ratio the better is the return relative to the amount of risk. A portfolio may have a high return but rank low in terms of the Sharpe ratio due to high risk. See OTIS “How is the Sharpe ratio calculated” for the mathematical definition.