Chapter 23: Breaking Into the Top Fifty

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It was afternoon.

Since investment students needed to trade in the stock market, the latest class schedule had all courses beginning at 3:15 p.m.

A university class lasted ninety minutes, so if they had two periods, the second would end at 6:30 p.m.

Getting out at that hour was actually perfect: they could finish dinner before returning to the dormitory.

Because he had chosen the right stocks, Zhang Yang had barely paid any attention to the market. Only shortly before closing did he take a look at Lai Weijie’s simulated trading account.

Lai Weijie’s entire account was invested, and his total profit stood at 149,300 yuan, representing a total return of 14.93 percent.

With a 35 percent increase spread across the remaining twelve trading days, he needed only a steady 2.91 percent per day to achieve the target return of 50 percent.

Although 50 percent was not a mandatory requirement, reaching it would virtually guarantee a place in the top ten.

[Zhang Yang]: The market has closed.

Although Zhang Yang and Lai Weijie had had a minor disagreement, Lai was still his financial backer. As usual, Zhang Yang sent him a closing-market notification.

Before long, a reply arrived.

[Lai Weijie]: I saw it.

[Lai Weijie]: Forgive me for being rash today, Brother Yang. I apologize. I’m sorry.

Lai Weijie truly had not expected the speculative capital to behave so ruthlessly—crashing a stock straight to its daily limit-down at the opening, then driving Chang’an Automobile to its daily limit-up.

He also had to marvel at Zhang Yang’s theoretical knowledge, understanding of the market, and trading techniques. Zhang was not merely several times better than him, but perhaps dozens of times better.

[Zhang Yang]: It’s all in the past.

Zhang Yang was not one to dwell on trivial matters. He and Lai Weijie were merely business partners, and theoretically speaking, once their cooperation ended, they would never have anything to do with each other again. There was no reason for him to remain angry.

…

After unplugging the network cable, Zhang Yang took his laptop and went to class.

The afternoon’s two courses were International Investment and Risk Management and Financial Modeling and Quantitative Analysis.

As fourth-year students, they had already reached the section on the VaR risk model, designed to prevent people from “jumping off a building.”

What was a VaR risk model?

It was a quantitative risk-management tool used to measure the maximum loss a financial asset or investment portfolio might suffer within a specified period and at a given confidence level.

There were three principal methods of calculating it:

1. Historical Simulation.

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The principle was to use historical data to simulate future risks directly.

The procedure was fairly simple: collect one year of return data from the A-share market, arrange the returns from the greatest loss to the greatest gain, determine the relevant percentile, and multiply that return by the current asset value to obtain the absolute amount of loss.

Its advantage was that it was simple and intuitive, requiring no assumptions about the distribution. Its drawback was that it relied on historical data and could not predict entirely new risk events.

When many ordinary investors studied historical price movements to make rough judgments about a stock’s bottom and top, they were essentially using the historical simulation method.

2. The Variance-Covariance Method.

This method assumed that asset returns followed a normal distribution, then used the mean and variance—or standard deviation—to calculate risk.

The specific procedure involved determining the average and standard deviation of historical returns, identifying the percentile corresponding to the desired confidence level, and then calculating VaR.

Its advantage was its speed. Its weakness was that it depended strictly on the assumption of a normal distribution and could underestimate extreme risks.

3. The Monte Carlo Simulation Method.

This was known as the “brute force creates miracles” method. Its basic principle was to use a computer to randomly simulate possible future paths for an asset’s price, thereby generating a large number of possible return distributions.

Its advantage was that it could handle complex distributions and nonlinear relationships. Its drawback was that it required enormous computational power, had to be implemented through programming, and depended on the reasonableness of the model’s assumptions.

These three calculation models helped investors understand the risks they might face.

The greatest difference between professional traders and ordinary retail investors was that the former were skilled at using various tools to avoid the risks brought by the stock market, while the latter tended to act more emotionally.

Of course, the VaR risk model was no universal insurance policy. It could only ensure that one knew what one was dealing with.

If a black swan event occurred, even the most formidable trader would suffer losses.

The curriculum at Shanghai Finance was quite thoughtful in its own way. They waited until graduation was approaching before teaching students how to control risk, as though they were afraid their own graduates might blow up their accounts and jump from a building.

…

As for the second course, Financial Modeling and Quantitative Analysis, a simple summary would be that it involved establishing mathematical models and applying quantitative methods to analyze investments and make decisions.

Put in plain English, it meant using mathematical models to calculate future rises and falls, such as through the ARIMA model, or autoregressive integrated moving average model, and the GARCH model, or generalized autoregressive conditional heteroskedasticity model.

As for quantitative models, VaR was a relatively defensive one. There were also trend-following models, statistical arbitrage models, and high-frequency trading models.

Zhang Yang had long since mastered both courses. He could also skillfully use all kinds of models for trading; it was simply that his current circumstances did not allow him to build actual strategies.

While the teacher tirelessly imparted knowledge at the front of the room, the class monitor, Lin Tian, had already sent the April 6 return table to the QQ chat group called Investment 122 Vajras.

First place: He Jing, 44.7 percent

Second place: Yin Shichang, 39.6 percent

Third place: Dong Lulu, 38 percent

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…

Ninth place: Lu Lixuan, 32.2 percent

Tenth place: Jia Pei, 30.8 percent

Compared with her closing return of 42.8 percent the previous week, He Jing had earned another 1.9 percent, moving yet another step closer to the 50 percent milestone.

Xu Jiafeng, who had ranked second the previous week, had somehow seen his return drop by 4.9 percent, sending him straight down to fifth place.

Yin Shichang, who had originally ranked ninth, had earned a return of 6.74 percent, catapulting him into second place and putting him close on He Jing’s heels.

At the bottom of the statistics sheet, Lai Weijie ranked first in single-day returns with a gain of 10 percent, and his overall ranking had also climbed into the top forty.

By then, Lai Weijie had become the focus of discussion in the QQ group.

[Yin Shichang]: Lai, what did you buy? A 10 percent return, fully invested in a stock that hit its daily limit-up—you’re being ridiculous!

[Chen Xiaohua]: You went from negative returns all the way into the top fifty among the professionals. Lai Weijie, you’ve really been hiding your talents!

[Xu Zhiruo]: Awesome!

[Wang Liu]: Have you been taking Viagra? Why are you suddenly so fierce?

Messages continued to flood the class group. For the first time, Lai Weijie experienced the intoxicating pleasure of being admired, and he quickly began typing replies to his classmates.

[Lai Weijie]: I was planning to give up and coast. I guess I just got lucky and happened to buy a stock that hit its daily limit-up. Pure luck, pure luck.

[Wang Lei]: You’re being far too modest. If I remember correctly, Lai Weijie, you’re a local from Shanghai. After graduation, won’t you be soaring into the clouds?

[Zhang Dai]: Shanghai big brother, please look after us!

[Bai Shanshan]: I want to date a Shanghai big brother.

As he watched the messages continue to appear, Lai Weijie repeatedly insisted that it was nothing special.

He knew perfectly well that these results had not come from him at all. Zhang Yang had done the actual work, while he could only keep playing humble to prevent the truth from coming out.

Lai Weijie’s rising rank also caught He Jing’s attention.

She still remembered how Lai Weijie had deliberately sought out Zhang Yang the previous week, sending her away while the two of them talked about something.

Looking at today’s return…

“Could it be that the two of them reached some kind of deal?”

The more He Jing thought about it, the stranger it seemed. She turned her gaze toward Zhang Yang in the third row.

At that moment, he was completely absorbed, striking the keys of his laptop as though he would never run out of things to do.

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