Risk aversion and group dynamics in the management of student managed investment fund.ABSTRACT The Student Managed Investment Fund (SMIF SMIF Standard Mechanical Interface SMIF Stream-based Model Interchange Format SMIF Shared Materials Instrumentation Facility (Duke University) SMIF Stanford Management Internship Fund SMIF SMAD4-Interacting Transcription Factor ) at California State University Enrollment  , Long Beach, has been in operation for eight years, a time
span that has covered a wide spectrum of market conditions. The records
of the decisions of the SMIF managers over this time period allow for an
examination of both the attitudes towards risk and return of the
students and some of the factors that contribute to the formation of
their expectations about the risk and return of investment alternatives.
Using information about the numbers of stocks analyzed an·a·lyze tr.v. an·a·lyzed, an·a·lyz·ing, an·a·lyz·es 1. To examine methodically by separating into parts and studying their interrelations. 2. Chemistry To make a chemical analysis of. 3. , the numbers of stocks actually approved for purchase, and the numbers of students in the class in each of the eight years, three main hypotheses are examined. First, that the students are return-seeking, in which case higher anticipated returns should lead to higher levels of stock-market activity. Second, that the students are risk-averse Risk-averse Describes an investor who, when faced with two investments with the same expected return but different risks, prefers the one with the lower risk. , in which case greater anticipated volatility would lead to reduced levels of stock-market activity. Third, that, due to the group dynamics group dynamics: see group psychotherapy. of the class, the larger the class, the greater the apparent degree of risk aversion risk aversion The tendency of investors to avoid risky investments. Thus, if two investments offer the same expected yield but have different risk characteristics, investors will choose the one with the lowest variability in returns. reflected in the students' decisions. Correlation analysis is used to examine these three hypotheses, and evidence is found in support of all three hypotheses, although the evidence in support of the third is not significant. Interestingly, the evidence also suggests that the students' risk and return expectations are informed by the stock market activity over the two years prior to the students' entrance into the SMIF program, roughly the length of their academic careers prior to commencing SMIF. 1. INTRODUCTION The Student Managed Investment Fund (SMIF) at California State University, Long Beach, began operations in 1996, and the 2002-2003 academic year marked the eighth year of operations for the fund. Over these eight years, which have covered a wide variety of market conditions, the student managers of the fund have achieved a successful record of portfolio management. The documented results of the program's history allow for an examination not only of the fund's performance but also of a number of issues of broader significance to the theory, practice, and teaching of investments. A key axiom of finance is that investors are risk-averse. However, the evident degree of risk aversion that investors display varies over time, depending not only on market conditions but also on the setting in which the investment decision is made. In the case of CSULB's SMIF program, the student portfolio managers demonstrate risk aversion characteristics that appear to differ from those that are typically demonstrated by students managing simulated portfolios. This behavior is evident both in the type of securities analyzed for possible inclusion in the SMIF portfolio and in the number of stocks actually selected for inclusion in the portfolio. It is anticipated that such behavior could be a consequence of both the market environment in the which the students are making their decisions and the dynamics of the groups within which the SMIF portfolio managers are making their investment decisions. The remainder of the paper is organized as follows. The initial sections of this paper describe the history and institutional background of the SMIF program and provide discussions of how SMIF's institutional structure would be anticipated to affect the students' investment performance and demonstrated levels of risk aversion. These sections are followed by our empirical analyses and conclusions. 2. BACKGROUND OF THE SMIF SYSTEM PROGRAM The SMIF program is an honors program consisting of students who are well-motivated high achievers with high GPA's and a strong career interest in the field of investments. Admission to the academic year program is by application with a brief essay addressing the applicant's career interests. Finalists for the 15 to 20 combined undergraduate and graduate positions are selected based upon the strength of the essay and performance during an interview by representatives of the Board of Advisors. The class is by and large self-directed self-di·rect·ed adj. Directed or guided by oneself, especially as an independent agent: the self-directed study of a language. self by the student participants, who develop the syllabus A headnote; a short note preceding the text of a reported case that briefly summarizes the rulings of the court on the points decided in the case. The syllabus appears before the text of the opinion. and the course schedule. The two faculty facilitators form the teams; leadership of the weekly classes is under the direction of a participant CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. . While both faculty members are always present in the classroom students are charged with the responsibility of directing class activities. However, both facilitators exert "suggested subtle directives," and their omni presence, combined with the consistent use of penetrating penetrating breaching the tissues of the body. questions, serves to bring understated but finely tuned focus to the course. This approach is utilized to build self-confidence among the participants and has been found to be very empowering to the students. 3. INVESTMENT PERFORMANCE AND SMIF The key goal of the SMIF program is to provide a unique educational experience while minimizing the significance of investment performance. However, it has become quite evident that students are driven by the sense of importance of managing a portfolio that performs well. Theoretically, the SMIF portfolio could outperform Outperform An analyst recommendation meaning a stock is expected to do slightly better than the market return. Notes: Exact definitions vary by brokerage, but in general this rating is better than neutral and worse than buy or strong buy. professional money managers. If markets were truly efficient, SMIF's performance, which is free from salaries and overhead costs overhead costs see fixed costs. , should exceed that of professionally managed portfolios. Various measures of the collective performance of money managers indicate that 60% to 90% underperform Underperform An analyst recommendation that means a stock is expected to do slightly worse than the market return. Also known as market underperform, moderate sell, or weak hold. their market benchmark. However, the $50,000 size of the SMIF portfolio may mitigate mit·i·gate v. To moderate in force or intensity. mit  i·ga tion n. this advantage. Further, the SMIF portfolio starts each new
academic year with $50,000 in cash, and at the end of the spring term
each year the portfolio is liquidated DAMAGES, LIQUIDATED, contracts. When the parties to a contract stipulate for the payment of a certain sum, as a satisfaction fixed and agreed upon by them, for the not doing of certain things particularly mentioned in the agreement, the sum so fixed upon is called liquidated damages. (q.v. . This approach is by design to
allow participants to experience the idiosyncrasies of portfolio
construction as well as portfolio management.4. SMIF INVESTMENT GUIDELINES guidelines, n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. In addition to the cash-to-cash paradigm the portfolio must adhere to adhere to verb 1. follow, keep, maintain, respect, observe, be true, fulfil, obey, heed, keep to, abide by, be loyal, mind, be constant, be faithful 2. diversification Diversification A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Notes: Diversification is possibly the greatest way to reduce the risk. guidelines including a limitation of no more than five percent of the portfolio invested in any one issue and no more than fifteen percent invested in any single industry. Fixed income instruments Fixed income instruments Assets that pay a fixed dollar amount, such as bonds and preferred stock. at or above investment grade must comprise 25% to 50% of the portfolio with the balance in equities. Stop-loss orders Stop-Loss Order An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position. This is sometimes called a "stop-market order". are utilized at ten percent of purchase price, or a trailing ten percent stop loss may be utilized at the discretion of the SMIF participants. Prior to the purchase of a security, which requires the approval of a two-thirds majority, a long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. price target must be established, prorated to the length of time remaining to the liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy of the portfolio at the end of the spring term. Again, this brings emphasis to the portfolio construction aspect of the program while also recognizing the significance of the management of assets once they have been placed in the portfolio. The SMIF program is overseen by a three member Board of Advisors consisting of a retired CEO from a major savings and loan savings and loan n. a banking and lending institution, chartered either by a state or the Federal government. Savings and loans only make loans secured by real property from deposits, upon which they pay interest slightly higher than that paid by most banks. firm, a former branch manager and current broker in a major full service brokerage firm, and a senior tenured ten·ured adj. Having tenure: tenured civil servants; tenured faculty. Adj. 1. tenured professor. 5. SMIF VERSUS CLASSROOM SIMULATIONS Most instructors of investment courses employ classroom simulations of portfolio construction and management. These simulations tend to focus on performance either by design or by the driven desires of the students. With the will to excel by being recognized for outstanding performance, simulations often lead to excessive risk-taking. The "real money" dimension of the SMIF program has resulted in a more conservative posture posture /pos·ture/ (pos´choor) the attitude of the body.pos´tural pos·ture n. 1. A position of the body or of body parts. 2. with a focus on the preservation of capital Preservation of Capital An investment strategy whose primary goal is to prevent the loss of an investment's total value. Notes: For investors using the capital preservation strategy to achieve their goal, they must ensure their portfolio is producing a return that is at . Adverse incentives in simulations, such as recognition by peers for achieving outstanding performance, or recognition for mismanagement mis·man·age tr.v. mis·man·aged, mis·man·ag·ing, mis·man·ag·es To manage badly or carelessly. mis·man age·ment n. in
the attainment of the worst performing portfolio, often serve as
motivating factors. This inherent shortcoming short·com·ing n. A deficiency; a flaw. shortcoming Noun a fault or weakness Noun 1. is frequently overlooked by the instructor who is often more interested in having students quickly construct portfolios to expedite ex·pe·dite tr.v. ex·pe·dit·ed, ex·pe·dit·ing, ex·pe·dites 1. To speed up the progress of; accelerate. 2. coverage of text material. On the other hand the SMIF program has not institutionalized in·sti·tu·tion·al·ize tr.v. in·sti·tu·tion·al·ized, in·sti·tu·tion·al·iz·ing, in·sti·tu·tion·al·iz·es 1. a. To make into, treat as, or give the character of an institution to. b. risk aversion, but students in the program are sensitive to the career enhancing nature of their pursuit and thus are more conscious of the implications of a well constructed and managed portfolio. Finally, simulations are generally driven by instructor directed activities with a pre-specified timeline
Timeline may refer to:
adj. 1. Arranged or proceeding in regular, systematic order. 2. Characterized by ordered and systematic habits or behavior. See Synonyms at orderly. in nature, and sound principals simply cannot be ignored in the quest to rush quickly to invest the proceeds of a fictitious Based upon a fabrication or pretense. A fictitious name is an assumed name that differs from an individual's actual name. A fictitious action is a lawsuit brought not for the adjudication of an actual controversy between the parties but merely for the purpose of portfolio. The primary emphasis in the SMIF endeavor is to allow students the opportunity to apply what they have previously learned in the courses that are prerequisites for admission to the SMIF program. This process orientation is perhaps the most significant differentiating aspect of SMIF. 6. SMIF AND RISK AVERSION Group dynamics play a significant role in the level of risk aversion in the SMIF program. Teams, generally consisting of four members, must first convince the other members of their team that a proposed security warrants sufficient merit to be considered for the portfolio. Subsequently, via a team presentation, compelling evidence must be presented in a manner that is sufficiently persuasive to motivate a two-thirds majority of the class members to vote affirmatively af·fir·ma·tive adj. 1. Asserting that something is true or correct, as with the answer "yes": an affirmative reply. 2. to include the security in the portfolio. This also differentiates the SMIF approach from that of simulated classroom portfolios where students generally have sole responsibility for issues that are included in portfolios. Each academic year the SMIF program culminates with an annual report that sets forth the collective activities of the participants. The report includes the names, and generally pictures, of the participants. This brings permanence Permanence law of the Medes and Persians Darius’s execution ordinance; an immutable law. [O.T.: Daniel 6:8–9] leopard’s spots there always, as evilness with evil men. [O.T.: Jeremiah 13:23; Br. Lit. to the performance perspective and also seems to assure that participants seriously take responsibility for their investment approach with due consideration of risk. The annual reports are widely utilized by students as supplements to resumes presented to prospective employers in their job related search activities. This serves to substantiate To establish the existence or truth of a particular fact through the use of competent evidence; to verify. For example, an Eyewitness might be called by a party to a lawsuit to substantiate that party's testimony. that SMIF participants have indeed supplemented their academic pursuits with real-world portfolio construction and management accomplishments. 7. HYPOTHESES AND EMPIRICAL RESULTS At the end of each academic year, the student portfolio managers of SMIF must develop an annual report that documents their portfolio construction and management process over the prior year. With the results now in for the 2002-2003 academic year, there are now eight years' worth of observations available for empirically examining the risk versus return expectations and attitudes of the SMIF students. Specifically, the three hypotheses of interest are as follows. Hypothesis One: The students are return-seeking In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke" put differently , the higher the anticipated returns for stocks, the greater the number of stocks the students will analyze and will accept for purchase. Hypothesis Two: The students are risk-averse. The greater the anticipated risk or volatility of stocks, the fewer the number of stocks the students will analyze and will accept for purchase. Hypothesis Three: A greater number of students in the SMIF class leads to a greater degree of risk aversion. Given the structure of the class, the need to achieve consensus in the presentation and selection of stocks should lead to behavior that appears more risk-averse the greater the number of students in the class. Or, to look at it another way, the more uncertainty there is about a given stock, the less likely it will be that the students will be able to come to a consensus to examine that stock more closely and then to vote to buy it, and so the greater the degree of uncertainty there is about the market as a whole, the smaller the number of stocks for which the class could come to a favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. consensus. These three hypotheses are examined using correlation analysis of the number of stocks analyzed, the number of stocks voted for purchase, and the percent of stocks voted for purchase out of all the stocks analyzed, with the number of students in the class and with two separate measures for the return and risk of stocks. In studying return-seeking and risk-averse behavior, a key issue that is always involved is how to measure the expected return Expected Return The average of a probability distribution of possible returns, calculated by using the following formula: and the risk that is seen in the eyes of the participants. Because the recent history of the stock market is likely to inform the perceptions that the students have coming into the class, two measures of historical return and historical volatility Historical Volatility The past standard deviation of a security that is used in security analysis. Standard deviation measures the changes in the past price of a security the higher the standard deviation the more volatile the security. are used--the average monthly return and the monthly volatility over the year prior to the start of the SMIF class's investment activities, and the average monthly return and the monthly volatility over the two years prior to the start of the SMIF class's investment activities. The results of the correlation analysis are shown in Table 1. The evidence in the table provides support for all three of the hypotheses. For Hypothesis Three, however, although the estimated correlations do have the correct sign (a negative correlation Noun 1. negative correlation - a correlation in which large values of one variable are associated with small values of the other; the correlation coefficient is between 0 and -1 indirect correlation with the number of students in the class, suggesting that a greater number of students in a SMIF class is associated with fewer stocks presented, with fewer stocks voted for purchase, and with a smaller percentage of stocks voted for purchase), none of these correlations is significant. The strongest of these three correlations is the correlation between number of students and number of stocks presented, for which the estimated correlation is -0.613, with a significance level of 0.108. It is important to note, though, that the small number of observations (there is only eight years' worth of data, so N = 8) makes it more difficult to find significant results. Nonetheless, the results obtained do suggest that the team / consensus structure does contribute to more risk-averse behavior among the class than might otherwise be the case. With regard to the first hypothesis (Hypothesis One: return-seeking behavior), a positive correlation Noun 1. positive correlation - a correlation in which large values of one variable are associated with large values of the other and small with small; the correlation coefficient is between 0 and +1 direct correlation would be expected between the measures of interest in the stock market (numbers of stocks analyzed and presented, numbers of stocks voted for purchase, and percentage of stocks voted for purchase) and the measures of anticipated returns (specifically, the average monthly returns over the year prior to the commencement of the SMIF class and the average monthly returns over the two years prior), and these are what are found. While the correlations between the return measures and the numbers of stocks analyzed are statistically insignificant, they are, nonetheless, positive. Moreover, both the measures of return (prior one year's and prior two year's) are significantly positively correlation with both the percentages of stocks purchased (significant at the 0.05 level) and the numbers of stocks purchased (significant at the 0.01 level). Finally, with regard to the second hypothesis (Hypothesis Two: risk-averse behavior), the evidence is somewhat weaker, but once again it is supportive of the hypothesis, with negative correlations found between the measures of interest in the stock market and the measures of anticipated volatility or risk. In this case, though, the only significant results are those between the average monthly volatility over the prior two years and both the numbers of stocks analyzed and the numbers of stocks purchased. This latter result is interesting--the average monthly volatility over the prior two years has a stronger association than the average monthly volatility over the prior year with the measures of the students' interest in the stock market. This suggests that the students' decisions and expectations are being more strongly affected, either implicitly or explicitly, by the more extended record of the stock market, especially in terms of assessing the risk of the market and are not being too heavily influenced by shorter-term activity in the stock market. Notably, this longer, two-prior-year horizon would also roughly coincide with the period of time that the average SMIF student spends at CSULB CSULB California State University at Long Beach prior to enrolling in the SMIF program. 8. CONCLUSION While the typical classroom approach to teaching the subject of investments appropriately provides an opportunity to allow students to pursue experimentation via simulations the limitations are vast and perhaps in some circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or even counter productive. Outcomes are very fleeting, lasting only for the duration of a few weeks, and the sole focus is on the course itself. On the other hand the SMIF program subjects students to a "greater authority" to include not only their classroom peers but also the recognition of participating in an honors program that is favorably fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. viewed throughout the college, the university and the community at large. Outcomes of their academic year experiences are memorialized in the annual report. And, finally, the entire SMIF experience brings a career focus that is otherwise unavailable to students by providing an opportunity to engage in real world experience that is not generally afforded by academia. These real-world aspects of the program do appear to be successful in encouraging behavior on the part of the students that is both long-term-oriented but responsibly risk-averse, an outcome that is often not the case for simulated portfolio classroom portfolios.
Table 1: Results of Correlation Analysis
Correlations
NUANALYZ NUPURCH
NUANALYZ Pearson Correlation 1 .694
Sig. (2-tailed) . .056
NUPURCH Pearson Correlation .694 1
Sig. (2-tailed) .056 .
NUSTUD Pearson Correlation -.613 -.448
Sig. (2-tailed) .106 .266
PERPURCH Pearson Correlation .096 .776 *
Sig. (2-tailed) .821 .024
Prior1Ret Pearson Correlation .613 .875 **
Sig. (2 tailed) .106 .004
Prior1Vol Pearson Correlation -.609 -.610
Sig. (2 tailed) .109 .108
Prior2Ret Pearson Correlation .587 .874 **
Sig. (2-tailed) .126 .005
Prior2Vol Pearson Correlation -.710 * -.723 *
Sig. (2 tailed) .048 .043
NUSTUD PERPURCH
NUANALYZ Pearson Correlation -.613 .096
Sig. (2-tailed) .106 .821
NUPURCH Pearson Correlation -.448 .776 *
Sig. (2-tailed) .266 .024
NUSTUD Pearson Correlation 1 -.133
Sig. (2-tailed) . .753
PERPURCH Pearson Correlation -.133 1
Sig. (2-tailed) .753 .
Prior1Ret Pearson Correlation -.555 .722 *
Sig. (2 tailed) .153 .043
Prior1Vol Pearson Correlation .356 -.302
Sig. (2 tailed) .386 .468
Prior2Ret Pearson Correlation -.698 .735 *
Sig. (2-tailed) .054 .038
Prior2Vol Pearson Correlation .545 -.367
Sig. (2 tailed) .162 .372
Prior1Ret Prior1Vol
NUANALYZ Pearson Correlation .613 -.609
Sig. (2-tailed) .106 .109
NUPURCH Pearson Correlation .875 ** -.610
Sig. (2-tailed) .004 .108
NUSTUD Pearson Correlation -.555 .356
Sig. (2-tailed) .153 .386
PERPURCH Pearson Correlation .722 * -.302
Sig. (2-tailed) .043 .468
Prior1Ret Pearson Correlation 1 -.714 *
Sig. (2 tailed) . .047
Prior1Vol Pearson Correlation -.714 * 1
Sig. (2 tailed) .047 .
Prior2Ret Pearson Correlation .915 ** -.474
Sig. (2-tailed) .001 .235
Prior2Vol Pearson Correlation -.786 * .958 **
Sig. (2 tailed) .021 .000
Prior2Ret Prior2Vol
NUANALYZ Pearson Correlation .587 -.710 *
Sig. (2-tailed) .126 .048
NUPURCH Pearson Correlation .874 ** -.723 *
Sig. (2-tailed) .005 .043
NUSTUD Pearson Correlation -.698 .545
Sig. (2-tailed) -.054 .162
PERPURCH Pearson Correlation .735 * -.367
Sig. (2-tailed) .038 .372
Prior1Ret Pearson Correlation .915 ** -.786 *
Sig. (2 tailed) .001 .021
Prior1Vol Pearson Correlation -.474 .958 **
Sig. (2 tailed) .235 .000
Prior2Ret Pearson Correlation 1 -.638
Sig. (2-tailed) . .089
Prior2Vol Pearson Correlation .638 1
Sig. (2 tailed) .089 .
N = 8
* Correlation is significant at 0.05 level (2 tailed).
** Correlation is significant at the 0.01 level
(2-tailed).
NUANALYZ = the total number of stocks analyzed and presented by the
given year's SMIF class
NUPURCH = the total number of stocks the given year's SMIF class
voted to purchase
NUSTUD = the number of students in the given year's SMIF class
PERPURCH = the percent of stocks voted for purchase out of all the
stocks analyzed and presented
Prior1Ret = the average monthly return for the S&P 500 over the year
prior to the start of the SMIF class's investment activities
Prior1Vol = the average monthly risk or volatility for the S&P 500
over the year prior to the start of the SMIF class's investment
activities
Prior2Ret = the average monthly return for the S&P 500 over the two
years prior to the start of the SMIF class's investment activities
Prior2Vol = the average monthly volatility for the S&P 500 over the
two years prior to the start of the SMIF class's investment activities
Dr. Peter A. Ammermann earned his Ph.D. at Virginia Virginia, state, United States Virginia, state of the south-central United States. It is bordered by the Atlantic Ocean (E), North Carolina and Tennessee (S), Kentucky and West Virginia (W), and Maryland and the District of Columbia (N and NE). Tech in 1999. He is currently an Assistant Professor at California State University, Long Beach, and a co-administrator CO-ADMINISTRATOR. One of several administrators. In general, they have, like executors, the power to act singly to the personal estate of the intestate. Vide Administrator. of CSULB's SMIF program. Dr. L. R. Runyon Run·yon , (Alfred) Damon 1884-1946. American writer known for his stylized, idiomatic stories about Broadway and the New York underworld, such as "Guys and Dolls" (1931). earned his D.B.A. at the University of Southern California The U.S. News & World Report ranked USC 27th among all universities in the United States in its 2008 ranking of "America's Best Colleges", also designating it as one of the "most selective universities" for admitting 8,634 of the almost 34,000 who applied for freshman admission in 1969. He is currently the Chair of the Department of Finance, Real Estate, and Law at California State University, Long Beach, and the administrator of CSULB's SMIF program. |
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