Thank you for participating in the Husky Investment Tournament! This week is your final week for trading, which will close at 11:59 p.m. on Friday, November 13. The winning team will be determined by their final portfolio value at the time of the completion of the tournament. We will announce the winning team on Monday, November 16.
We hope you have enjoyed learning and interacting with us as much as we have with you.
Once the competition is over it would make sense to calculate your portfolio return. The portfolio return is calculated by taking the ending portfolio value divided by the beginning value and converted into a percentage to yield the total portfolio return. Annually, the market has returned between 6-8 percent. How do you compare? Was your stock picking better than what the market would have returned? Our competition was only seven weeks long (35 days) compared to the 250 trading days there are in a year. Doing some math we can convert the 7 percent return to our time period of 35 days.
7% return over 250 days = 0.028% per day
0.028% * 35 days in competition = 0.98% return
If we take the $1 million we started with and use the simple interest formula for the 0.98% return we find that it calculates out to $1,009,800.
FV = $1,000,000 * (1.0098) ^1 = $1,009,800
So all of the teams that finish above that amount “beat the market.”
However, the portfolio return formula fails to take a very important factor into account—risk.
We have encouraged teams to pursue risk in order to win the competition—here is the reason why. As you can see, the total portfolio return does not take the amount of risk that you pursued into account while calculating your percentage return. Because of this, teams may have found it lucrative to pursue a higher level of risk in order to achieve a higher potential return.
While this strategy works well in a trading competition, where there is nothing to lose and everything to gain from pursuing risk, we would not want you to leave the Husky Investment Tournament thinking this is the best strategy for investing for retirement, or that this is how portfolio returns are measured in industry. In the real world, portfolio returns are risk-adjusted or adjusted to show how much extra return you generated per unit of risk. This comparison shifts the question from “how much money did you make me?” to “how much did you risk to make me this money?”
In this week’s video, Dean Johnson, dean of the MTU College of Business, introduces risk-adjusted return metrics and how investors use them to measure their investment results.