Stock Market Games

Kagan, Gary, Herbert Mayo, and Robert Stout. "Risk-Adjusted Returns and the Stock Market Games." The Journalof Economic Education. 26 (Winter 1995) 39-50.

Over 142,000 students have participated in the New Jersey stock market game since it began in 1985. Each participating group is give $100,000 (an extra $100,000 may be borrowed on margin) with which to earn the greatest return over the duration of the game. The current game rules encourage students to make risky purchases in hopes of making phenomenal returns. Kagan et al, believe that the game should be changed to stress diversification and portfolio construction. One possible change would be to compute earnings based on risk adjusted returns. Good measures of such risk adjusted measures are the Sharpe index and the Treynor index. They are as follows:

S = R_p - R_f

standard deviation of returns

T = R_p - R_f

beta of the portfolio

Where R_p represents the return of the individual portfolio, and R_f is the risk-free rate earned during the time period. Another way to improve the game would be to stress diversification. Kagan et al, suggest adding a requirement that all groups would have to hold at least five different assets at a time. Also, other forms of securities such as mutual funds and bonds could be added to give participants more choice. The authors of this article feel that changes such as these would greatly improve the current stock market game in New Jersey.