Equities · Index
RP2 RP1 with private forecasts
Session timeline
Briefing
Trading40 min
Debrief
The case
Three companies and a market index trade together. Each desk receives forecasts of the final index.
Objective
Build the portfolio that gives the best grade, which rises with the logarithm of final wealth.
What it shows
- The RP1 market with private information added.
- Unbiased forecasts whose error differs by desk and narrows with time.
- Whether a price learns from two desks that each know half.
Watch out for
- Acting on a forecast early, when its error is widest.
- Reading a price move as news when it is only the other desk trading on its forecast.
- Logarithmic grading: over-trading a small edge costs more than it earns.
Who takes part
- Desk A — half the class. Builds a portfolio from A, B and C. Receives unbiased forecasts of the final index whose error shrinks over time.
- Desk B — the other half. Same securities; forecasts that differ from Desk A's.
Class size
Twelve to forty students, split evenly between the two desks. Runs well straight after RP1 with the same class.
Concepts
- CAPM
- Adverse selection
Roles
Desk A
You are desk A. You build a portfolio from companies A, B and C. INDEX is the market.
- You receive unbiased forecasts of the final index. The error shrinks over time.
- Desk B's forecasts differ from yours.
- Your grade rises with the logarithm of final wealth.
Desk B
You are desk B. You build a portfolio from companies A, B and C. INDEX is the market.
- You receive unbiased forecasts of the final index. The error shrinks over time.
- Desk A's forecasts differ from yours.
- Your grade rises with the logarithm of final wealth.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| A | Company A | Continuous trading | Trade it |
| B | Company B | Continuous trading | Trade it |
| C | Company C | Continuous trading | Trade it |
| INDEX | Market index | Continuous trading | See it, not trade it |
In the tracks
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