Trading Case CA2P

Case Objectives

To understand mean-variance portfolio efficiency; to learn how prices of risky assets are determined in a market; to understand how CAPM applies to price discovery.

Key Concepts

Market efficiency, Capital market line and the market price of risk, expected utility theory, diversification and price discovery.

Case Description

This trading case is the same as CA1 except that in this trading exercise you will receive private news headlines at random times during the trading period. You should first read trading case CA1 carefully before attempting to trade this case.

Case Data

The possible paths for the economy, and the corresponding end-of-period realized values for the three companies are shown here. The average value is also shown.

Path	1	2	3	4	5	6	7	8	9	10	Average
Co. 1	5	5	5	24	25	30	32	68	75	75	34.4
Co. 2	4	5	10	21	66	65	65	20	20	20	29.6
Co. 3	55	55	49	22	22	20	10	10	10	10	26.3

Trading Objective

Your aim is to maximize your return at the same time minimizing your risk. You should work through the section titled Earning a Trading Bonus in CA1 to see exactly how your trading bonus is computed.

Private Information

You will receive private news items at random times throughout the trading day. This will be in the form provided in the following table:

Path of Economy	Private News
1	Deep recession
2	Recession
3	Mild recession
4	Normal 4
5	Normal 5
6	Normal 6
7	Normal 7
8	Mild expansion
9	Expansion
10	Strong expansion

You will receive private news that reveals that a path will not occur. For example, “Not deep recession” means that path 1 will not occur. Private news means that the set of messages you receive may be different to the set of messages another trader receives. It is also possible that the news you receive is redundant, that is the same as previous news you received.

You can see your private news from a single click on the security name Co. 1, circled below, to reveal the clue in the upper center part of the trading screen (example below is “Not deep recession).” This means that path 1 of the economy will not occur. See the screen below.

Trading Screen