Download CHAPTER 1: FINANCE THEORY

CHAPTER 2 ASSIGNMENT: Do the Darts Win?
On October 4, 1988 the Wall Street Journal began a contest that was inspired by a
popular book by Burton Malkiel entitled A Random Walk Down Wall Street.1
Malkiel hypothesized that ”a blindfolded monkey throwing darts at a
newspaper’s financial pages could select a portfolio that would do just as well as
one carefully selected by experts.” Malkiel strongly recommends that people
invest their money in stock index funds. In the WSJ contest, four professional
fund managers were selected each month to compete against staff members at
the WSJ who took the role of the monkeys by randomly selecting stocks. The
contest was very popular among readers and generated many academic studies.
In the end, the pros won 61 of the 100 contests but the pros’ picks look even more
impressive when actual returns are compared. The average return for the pros
was 10.8% compared to 4.5% for the darts and 6.8% for the Dow Jones Industrial
Average (DJIA).2 To get hands-on evidence regarding their ability to pick stocks
compared to random selections and passive indexing, students can use the 30
stocks in the DJIA, an equally-weighted stock basket.
The instructor randomly numbers the stocks from 1 to 30 without revealing the
number assignments. Each student individually selects five numbers from 1 to
30 after which time the instructor tells them the number assignments. Each
student then has a “dartboard” portfolio of five stocks, which can be equallyweighted. The students then select 5 stocks in an allotted period of time (e.g.,
before the class period ends). The students could compute the average return
and standard deviation for their portfolio over a specified sample period (e.g.,
the subsequent month). Data is readily available from http://finance.yahoo.com
or other internet sources.
See Malkiel, B. G., 2004, A Random Walk Down Wall Street, 7th edition (W.W.
Norton & Company, New York).
1
For additional information on the contest see the WSJ website at
http://www.investorhome.com/darts.htm (accessed on June 18, 2008).
2