Summary

This project is to help students to get familiar with the process of finding trading strategies. The excel file ‘project2_data’ provides information on firm characteristics and returns for 88 firms across 1990-2008. However, the returns in 2008 of these 88 firms are not reported. Students are supposed to find a good trading strategy, with 100$ (no short sales), for 2008 based on the information by 2007, which means that students are at the beginning of 2008 and thinking about how to trade across these 88 firms to get a good return at the end of 2008.

Due Date

The project is due at 11PM April 17 via Blackboard.

Grading

The student should construct a trading strategy with reasonable justifications, test the strategy and have correct inferences from the test. The writing is clear and logical. The project describes the portfolio for 2008 clearly and receives a reward according the actual performance. In specific, you need to answer the following questions:

1. What is your story about how to construct good portfolios (trading strategy)? In other words, which firm-level variable(s) can serve as a standard for picking stocks? (2 credits)

2. How do you show that your trading strategy works in 1990-2017? (6 credits) Clearly describe how you construct the portfolios and test your strategy. When using regressions in testing your strategy, show relevant results.

I will calculate your portfolio’s return in 2008 after the project is turned in. Projects that have a return among top 30% of the class will earn 2 credits; the projects that have a return among bottom 30% of the class will earn 0 credit for performance; the rest of the projects earn 1 credit.

Delivery Requirements

The project should be done within an excel file. The file should include (1) the text on how you pick firm-level variables for your trading strategy and how you test the strategy, (2) the results of the test with clear demonstration on how you use the results to evaluate the test results, and (3) an separate sheet in the excel file including two columns: firm id and how many dollars (100$ in total) you spend on each firm (in the order of firm number and including firms you spend nothing on, otherwise you will lose all the 2 possible points of performance). The two columns take the following form:

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