University Students as Portfolio Managers: Performance versus the Market, Experts, and Random Selection

INTRODUCTION The modern version of the efficient market hypothesis (EMH), as originally developed by Fama (1965), argues that there is an inherent level of efficiency in financial markets. The efficient market hypothesis implies that it is impossible to consistently outperform the market index. This does not imply that the market cannot be outperformed from time to time, but rather, that is cannot be done on a consistent basis. The theory has generated a considerable volume of comment and is one of the most widely tested theories in financial economics. The three postulated forms of the efficient market hypothesis are strong, semi-strong, and weak. Strong form efficiency states that stock prices accurately reflect all information available, from both public and private sources. This is rather difficult to empirically test given existing laws against insider trading and the difficulties with obtaining relevant information in private hands. Semi-strong market efficiency addresses this limitation by stating that stock prices reflect all publicly available information. Under this variant, markets respond quickly and accurately to any new information that is available. The weak form of EMH holds that all information contained in past stock prices is fully reflected in current prices. The implication of the weak form is that established trends cannot reliably be used to predict, and therefore beat, the market in the future. While a number of researchers have tried to test the efficient markets hypothesis, the myriad of results and their implications do not lend to drawing a clear conclusion. For example, Haugen (1998, 1999), asserts that markets are inherently inefficient and therefore do not support the efficient markets hypothesis theory. On the other hand, others in academia, notably Fama (1997) provide extensive support for market efficiency. To this day, the concept is continuing to be explored and clarified (e.g. Jarrow and Larsson, 2012) without a successor for explaining the relationship between markets and information. When any investors, be it a student group, an individual, or a professional manager invest money in the stock market, their goal is generally to beat the market's performance. If not, they should simply place their funds in a mutual fund and allow that fund to work to meet market expectations and performance. If a group of investors, in this case student groups, were to outperform the market once or twice, it would not provide definitive evidence against the efficient market hypothesis; however, if they were able to outperform the market repeatedly over time, it would lend some credence to a violation of market efficiency. An initial question to address, however, is whether using students as research subjects in this situation provides sufficient external validity. STUDENTS AS RESEARCH SUBJECTS Exploring (and explaining) the concept of the Efficient Market Hypothesis with students is nothing new. As an exercise within the confines of the classroom, instruction and hands-on experience on the workings of the EMH and related topics has been both popular and ongoing (e.g. Park, 2010; Ammermann, Runyon, and Conceicao, 2011; Carter and Jones, 2011; Donaldson, Flagg, and Orr, 2011). Others, including Melton, and Mackey (2010) have gone proposed an entire undergraduate course on investing that features real dollars. While the use of actual funds by college students as part of the learning process has been and continues to be popular on college campuses, the shift from the management of theoretical portfolios to real ones is rooted in the search for realism. What began as in-class exercises with faux dollars has progressed to funded trading accounts to course-independent investment projects overseen and managed by college students without set end points. Given this new reality, the practice of collecting data from students involved in these more-realistic investment scenarios raises the perennial question of the validity. …