TRADING CASE RP2
Risk, expected return, and private forecasts
LEARNING OBJECTIVE
Connect spot prices, expected returns, market efficiency, and progressively improving private information.
KEY CONCEPTS
Market efficiency | CAPM | Private forecasts | Diversification | Price discovery
HOW THE CASE WORKS
The three stocks and nine equally likely economic paths are the same as RP1. One path is realized after trading and positions are liquidated at the corresponding values.
CASE DATA
| Path | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | Avg. |
|---|---|---|---|---|---|---|---|---|---|---|
| Company A | 39.112 | 34.786 | 30.459 | 28.295 | 23.969 | 22.238 | 19.642 | 17.478 | 13.157 | 24.459 |
| Company B | 43.218 | 40.762 | 38.306 | 37.078 | 34.623 | 33.640 | 32.167 | 30.939 | 28.483 | 35.469 |
| Company C | 39.889 | 44.777 | 49.665 | 52.109 | 56.997 | 58.953 | 61.886 | 64.330 | 69.218 | 53.314 |
| Market index | 1400 | 1300 | 1200 | 1150 | 1050 | 1010 | 950 | 900 | 800 | 1084.444 |
MARKET SETTING
Cash earns or costs 1%. The market index cannot be traded. During trading, each trader receives unbiased forecasts of the final index value. Forecast errors differ across traders and become smaller as time passes.
TRADING RULES
- Click Company A to view forecasts in the information box.
- A forecast equals the true final index plus or minus an unbiased error.
- Combine multiple forecasts and market prices; the trading crowd collectively has more information than any one trader.
- Use bids, asks, market orders, borrowing, and short selling to manage the portfolio.
AFTER TRADING CLOSES
The realized event or economic path determines the security payoffs. Cash, long positions, and short positions are settled according to the case rules.
PERFORMANCE: Grade cash = 1000 x ln(closing market cash). The logarithm rewards higher final wealth while making each additional gain progressively less valuable, encouraging you to consider both risk and return. If market cash is zero or negative, grade cash is zero; results accumulate across trials.