Market Efficiency and Diversification: An Experiential Approach Using the Wall Street Journal's Dartboard Portfolio
12 Pages Posted: 22 Feb 2005
The concepts of market efficiency and portfolio diversification are easy to understand, but it is difficult for some to comprehend the relation of risk and return. A good way to teach these concepts uses the Wall Street Journal's dartboard contest, where dart throws and professionals pick only four stocks per period. Undergraduate students can use the contest to form portfolios; calculate returns, wealth changes, and risk measures; and compare results to unmanaged indexes over time. Doctoral students can use the contest to estimate a market model to calculate abnormal returns and announcement effects, and adjust for time series issues. Dart picks beat the pros over the 1990-2001 period on both on a cumulative wealth and risk-adjusted basis. Neither dart nor pro picks beat the S&P 500 or the DJIA on a raw return basis, and both fall well behind on a risk-adjusted basis. Analysis like this can enhance student understanding of the basic issues in market efficiency, diversification, and portfolio theory.
JEL Classification: G11, G14
Suggested Citation: Suggested Citation