Selecting stocks and building portfolios: a sorting exercise

Abstract

Purpose – The purpose of paper is to provide students with a sorting methodology to select securities and build portfolios.Design/methodology/approach – This paper uses various accounting variables for all firms in the S&P 500, sorted by sector. The fundamental metrics are converted into standardized Z‐scores and then combined into a single score used to rank individual firms within each industry. Equity portfolios are then constructed using the aggregate Z‐scores.Findings – In the authors' experience with student‐managed investment funds (SMIFs), students at the start of the course consistently ask how to begin selecting securities or seek to learn a new model for selecting securities. Discussions on stock selection are helpful to engage students in this area, but an attempt is made to further this by providing a comprehensive stock‐selection exercise to help students better understand how to appropriately pick stocks and create a portfolio.Practical implications – In this exercise, students are reminded...