Introduction

A simulation game entitled 'Managing Your Own Portfolio' was developed and used in RE3281 "Real Estate Market II" in Semester 1, Academic Year 2007/2008. This article examines how this game helped students improve their understanding of portfolio management theories. Through this game, I hope to simulate real-life market scenarios and illustrate to students how these theories can be applied to analyse their portfolio decisions. I also hope this game will enable RE3281 students to expand their learning horizons and go beyond their textbooks. The learning objectives would have been achieved if after completing this module, students can appreciate what market volatility is, rather than perceiving RE3281 as a module that merely teaches them how to compute standard deviations of asset returns.

Simulation Games: Helping Students Put Theory into Practice

As a famous saying goes, "Don't put all your eggs in one basket." Indeed, diversification and risk-return trade-offs are concepts which form the cornerstones of portfolio theories covered in RE3281. However, student s without reallife experience in making investment decisions may have diff iculty appreciating what risk in investments entails. Developing creative teaching methods, such as a computer simulation game, is one way to overcome the challenge of engaging students with these concepts.

Playing the Game

The game was played four times over two weeks in October 2007. As the game's title implies, students had to manage their own account and investment portfolios. At the beginning of the game, each student was allocated a cumulated sum of $180,000 in savings. They also received an additional $25,000 in cash savings at each game period for investment purposes. The savings increased by 10% per period.

Students could invest their savings in any of the following asset classes:

1. Real Estate
   
   Students could invest in a HDB f lat or a private apartment. However, they could only purchase one unit of real estate per period. Similarly, they could sell no more than one unit per period if they own at least one property in the previous period. Property prices were announced every period through an online announcement board on IVLE. Students who did not own real estate would incur rental expenses of $12,000 per period.
   
   
2. Stocks
   
   Students could buy or sell stocks listed on the Singapore Exchange. They made their final stock picks and transacted quantities based on the stocks' closing prices at the end of each game period. If they held stocks for more than one period in their portfolio, they would earn a 7% dividend yield on the stocks by the end of each period.
   
   
3. Bonds
   
   Students could make bond investments in multiples of 5,000 units valued at $1 per unit. Each unit carried a fixed coupon yield of 5% per period. They could also redeem the bond at par value at each game period.

Students could also choose not to make any investments, keeping their cash accounts at status quo. If they adopted this strategy, they not only incurred annual rental expenses amounting to $12,000, their cash accounts would also earn zero interest rate (i.e. cash is a negative hedge against inflation).

To reflect market realities, the three asset classes were designed with different levels of information uncertainty. Real estate information was imperfect as prices were arbitrary and the price generation process was not disclosed to students. Bond returns, however, were fixed by a constant coupon yield. Stock prices in the game ref lected market sentiments and fundamentals.

Figure 1: Students are required to upload their end-of-period portfolio compositions via IVLE

Figure 2: The aggregate portfolio weights will be announced via IVLE before the start of the new game period

At the beginning of the game, each student was given a standard spreadsheet to keep track of their investment activities and changes in portfolio compositions. They had to upload their portfolio compositions via IVLE at the end of each game period (Figure 1). The aggregate distributions of asset weights for the class were also uploaded at the end of each period (Figure 2). The class did their final calculations when they completed the game. The difference between their initial and final balance sheet determined how well (or badly) their investment portfolios performed. However, students were not assessed solely on the performance of their investment returns, as higher returns could mean they took higher portfolio risks. They also had to submit a short report explaining their investment and portfolio strategies, and describe lessons they learnt from the game.

Student Feedback

The game garnered posit ive responses f rom students. Many felt the game taught them good lessons about making sound investment decisions when managing their portfolios:

• "The exercise.kept me excited and on my toes throughout these 2 weeks.constantly checking on the stock prices, the made-up property prices and always keeping tabs on my total profits.I must say, something felt amiss when it all ended."
  
  
• "In period 2, I jumped into the stock market upon seeing that prices [had] fallen. Unaware of the negative transmission from the US, my shortsightedness told me falling prices will rise. In reality, prices plunged further and it never rose back until the last period."
  
  
• "In this game, I have also relied on the "Brokers' Take" section of The Business Times.for free investment advice. However, there were several occasions where the forecast and predictions were wrong.instead of making profits, losses were made."

Concluding Remarks

The objective of including this game in RE3281 was to expose students to the markets' volatile nature and also enable them to relate concepts they learnt, such as the efficient market hypothesis and portfolio diversification, to real-life scenarios. It was not meant for students to apply sophisticated trading strategies so their investments can outperform the markets. I do not expect students to become instant master chartists, expert stock traders or speculators after playing this game. However, I hope students were able to appreciate how market shocks can inf luence the value of their assets. A good example is the sub-prime crisis in the US, which occurred while the game was played. The game would also have achieved its objectives if students started taking a greater interest in current affairs and see how they affect the market, such as how SIA's inclusion of new A380 aircrafts to its current f leet affected its share prices, and the impact of escalating oil prices on the economy. Such skills would enhance their effectiveness as future portfolio managers.