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Part B: Marking and Assessment
(to be completed by Module Lecturer)
Assessment Tasks:

Carry out portfolio diversification analysis, form trading strategy using financial derivatives and discuss the implications of EMH and BF for trading and investment.

Section A Portfolio Investment (indicative word count: 1600)

Select 5 stocks (priced in the same currency) from 5 different sectors and download weekly share price data (adjusted close price data) from for the 5 stocks over the time period from Jan 2015 to Nov 2020.

  1. Calculate the average weekly rate of return and weekly rate of return standard deviation for each stock. Please tabulate your calculation results and illustrate them in a chart. Which stock generated the highest average weekly rate of return, which stock had the highest risk, and which stock rewarded the investors the highest risk-adjusted return, over this chosen time period?
  2. Calculate the weekly rate of return correlation coefficient between any two stocks using the same dataset. Please tabulate your calculation results. Which pair had the highest correlation coefficient over this chosen time period? Please discuss factors that may have driven the correlation of these two stocks.
  3. Please form an equally weighted portfolio that consists of the two stocks with the lowest correlation coefficient. If we assume that history repeats itself in stock share price weekly movement, what is this portfolio’s expected weekly rate of return and expected weekly rate of return standard deviation? Please interpret your results. (Assume weekly rate of return follows normal distribution)
  4. Please demonstrate the risk reduction advantage of diversification.

Section B Trading Risk Management (indicative word count: 400)

Select a stock and design an option trading strategy based on your expectation. Explain how this option trading strategy works with the option payoff diagram.

Section C EMH and Behavioural Finance (indicative word count: 1000)

Critique how it is possible to profit from trading based on technical analysis, if stock markets are ‘efficient’, and the contribution of ‘behavioural finance’ to perhaps explain why it is possible.

Sample Solution

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Reference no: EM132069492


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