MANASA KARUSALA
DIVYA YEDAMA

1) What was your strategy in the classroom market? What did you think each of the assets was worth? Were you able to implement your strategy? Why or why not? Why (or why wasn't) your strategy successful?
My strategy was to equalize both the red and blue assets, as it is impossible to predict before hand which asset would have more value. But I couldn’t implement my strategy, as it is not easy to maintain that equivalence especially when the entire market is active with too many active participants. Though I did not implement my strategy, as I was unable to compete in the active market and couldn’t buy or sell the assets, I am among the people with highest amount. This is because I had 5 red assets initially and the value of red asset was way too high than blue asset. If I had implemented the strategy I would have had lesser money, as the value of blue asset is very less than the red ones and ones with more red assets would benefit more.

Frankly I didn’t have any estimate of what each asset would value at. The probability for each number is equal and hence prediction is difficult.

Then in game 2 most of the people might have had the thought of increasing the red assets but I thought the value might drop and blue might weigh more. With this view I did not sell any of the blue assets I had. As a result my instinct was true and I was again among the players with most money.

So irrespective of the strategy I was successful in the 2 games.

2) Did the assets trade at prices near their expected values?
In the first game the market exceeded the expected price where the red assets value was very high and the blue assets value was very less.
In the second game comparatively the values reduced but the blue value was higher than the red ones.

3) What is meant by "risk aversion"? Were you risk averse? Was the market as a whole risk averse? Explain why or why not?
Risk aversion is when the person is unwilling to take any amount of risk in his payoffs. To understand this let us see an example. If a person is given two options and asked to choose one among them he chooses the one, which pays less but has less risk and has more certainty of obtaining rather than the one, which pays, more but has less certainty.
I didn’t to be risk averse but seeing my results I was risk averse.
The market as a whole wasn’t risk averse.

4) Using the average trading prices of the red and blue assets, calculate the expected returns, and the standard deviation of returns. Calculate the returns based on purchasing each asset at the average trading price, and liquidating the asset after the market closes. Also calculate the correlation between red and blue asset returns.

GAME 1 | | | | | | RED PRICE | BLUE PRICE | RED return | BLUE return | | 21 | 21 | 42.86% | -71.43% | | 20.9 | 21 | 43.54% | -71.43% | | 20.9 | 21 | 43.54% | -71.43% | | 20.9 | 22 | 43.54% | -72.73% | | 20.5 | 21 | 46.34% | -71.43% | | 20 | 25 | 50.00% | -76.00% | | 21 | 23 | 42.86% | -73.91% | | 22 | 25 | 36.36% | -76.00% | | 21 | 25 | 42.86% | -76.00% | | 21 | 25 | 42.86% | -76.00% | | 20 | 24 | 50.00% | -75.00% | | 21 | 26 | 42.86% | -76.92% | | 20 | 26 | 50.00% | -76.92% | | 23 | 24 | 30.43% | -75.00% | | 22 | 25 | 36.36% | -76.00% | | 20 | 24 | 50.00% | -75.00% | Average | 20.95 | 23.63 | 43.40% | -0.74 | Standard deviation | 0.8 | 1.80 | 5.31% | 0.02 |

Correlation : 0.0362

GAME 2 | | | | | | RED PRICE | BLUE PRICE | RED return | BLUE return | | 22 | 22 | -45.5% | 0.00% | | 23.5 | 21 | -48.9% | 4.76% | | 23 | 21 | -47.8% | 4.76% | | 26 | 20 | -53.8% | 10.00% | | 22 | 21 | -45.5% | 4.76% | | 23 | 21 | -47.8% | 4.76% | | 23 | 19 | -47.8% | 15.79% | | 24 | 18 | -50.0% | 22.22% | | 23 | 10 | -47.8% | 120.00% | Average | 23.278 | 19.222 | -0.483 | 0.208 | Standard deviation | 1.133 | 3.457 | 0.024 | 0.357 |

Correlation : -0.01

5) Construct the efficient frontier (risk versus expected return) for portfolios consisting of red and blue assets. How large (if any) were the gains from diversification? Did you diversify? Why or why not?

Our strategy was to diversify, but we didn’t manage to, as the price of the assets was extremely high.

6) Calculate the CAPM beta of each asset. Were the asset expected returns proportional to their beta?
The market expected return would be the average return of all the traded assets in market.
According to CAPM, E(Red) = R(risk free) + B(Red)*(Risk Premium)
We have risk free = 0, B(red) = E(Red)/E(M)

GAME 1 | | | Market expected return | Beta Red | Beta BLUE | -0.155246723 | -2.795595415 | 4.795595415 |

GAME 2 | | | Market expected return | Beta Red | Beta BLUE | -0.137742471 | 3.508929539 | -1.508929539 |

7) Using Solver, calculate the tangency portfolio. Use a risk-free interest rate of zero.
GAME 1: Portfolio composition | | RED | 84.6% | BLUE | 15.4% |

GAME 2:

Portfolio composition | | RED | 89% | BLUE | 11% |

8) According to the CAPM, the market portfolio is the tangency portfolio. For supply to equal demand, the tangency portfolio should have the same weights as the aggregate supply of risky assets. Is this true in our market?
In this case the supply to equal demand does not have the same weights as the aggregate supply of risky assets.

9) Overall, how well does the CAPM describe our classroom markets?
The CAPM did not play a major definitive role in our classroom market.