Risk Management- Assessment 3

Risk Management- Assessment 3
1) Tesla -914 SHARES FOR $ 442.15 PER SHARE
2) coca-cola-6638 SHARES FOR $50.45 PER SHARE
5) NIKE-1803 SHARES FOR $ 114.66 PER SHARE
Guideline for Investing and Calculations
Portfolio Investment Strategy
Since the trading game is only for a few weeks, the investment strategy is to generate high short-term growth in the value of the portfolio over the trading period. Use fundamental (EPS / PE ratio / ROE) and technical analysis (simple MA50) to construct your initial equity portfolio.
Marking Guide Report must include the following sections: (this marking guide is made to give you an indication of the weight given to each part, but the final scores will be determined based on the marking rubric)
1. Trading philosophy: (4 marks)
Give an overview of your trading philosophy, i.e. how stocks were selected and strategy to outperform the market. You should identify yourself as a value or growth investor or a mixture of both.
2. Portfolio construction: (10 marks)
Present your initial portfolio including information on why you have invested in the stocks in your initial portfolio. This part should also include specific information on
a. the fundamentals of each stock (2 mark)
b. the technical analysis of each stock (2 mark)
c. news and the overall market and macroeconomic condition (2 mark)
d. The initial weightings of the portfolio and the rationale for that composition (2 mark)
e. expected return of your portfolio using the CAPM (Beta, risk free rate, expected market return) (2 mark)
3. Risk identification: (14 marks)
In this part you should discuss the risk profile of your portfolio. The discussion should include the following points:
a. The systematic risk of your initial portfolio (4 marks)
b. The unsystematic risk of your initial portfolio (4 marks)
c. Calculation and discussion of the five day 99%-Value at Risk of your portfolio using historical approach. (6 marks)
4. Hedging: (16 marks)
Explanation on how the portfolio was hedged. This includes:
a. How you used the Futures contract to hedge your initial equity portfolio position against a possible market decline. Provide calculation as necessary. (8 marks)
b. How you used the Options contract to hedge your individual stock position. Provide calculation as necessary (8 marks)
5. Reflection on the trading process: (36 marks)
An important goal of this assignment is to give you a (costless) insight into your trading behavior, risk appetite and your risk management process. Learning from this activity includes
a thoughtful, comprehensive reflection of the trading and hedging process. Your reflection should include:
a. Your risk appetite. Hint: are you risk-love or risk-averse? How did this influence your selection of stocks in your trading and the hedging activities? Has your appetite remained the same or has it changed after you experienced this investment activity? Explain. (4 marks)
b. A comparison of the return expected on the portfolio (i.e using the CAPM model) and the actual return achieved (based on stock price movement). Discuss the difference and implication this has in relation to the potential risk in stock portfolio investment. This discussion may requires a demonstration of good understandings of the CAPM model, how it is used and what it often shows, which may require a good revision and/or additional research on this model. (8 marks)
c. A calculation of the net portfolio return taking into account the hedging transaction. (6 marks)
d. A calculation of net return of the particular stock that you have hedged using option. (6 marks)
e. A comparison and contrasting of the hedging transactions, based on which you should make a conclusion on i) the effect of hedging on your investment portfolio e.g how it helped you manage the risks that you have identified (in part 3) ii) the preferable derivative contracts (among the two) that you would prefer to use in hedging an investment portfolio. (12 marks)
6. Usage of professional Figures and Tables: (10 marks)
7. Language: (10 marks)
Total=100 marks
Bonus marks: Trader with the
○ highest portfolio return will be awarded 3 extra marks,
○ 2nd highest portfolio return will be awarded 2 extra marks,
○ 3rd highest return will be awarded 1 extra mark.
● The report will include VAR calculations which will require you to use Excel. Therefore, though the result of calculations should be discussed in the report, you should submit a separate Excel file to Canvas to show your detailed calculations.
● This instruction includes suggestions on items to include in the report, more information for parts you think are important may be included as you feel necessary, keeping in mind the word limit.
● Keep in mind that the main focus of this assignment is on the Risk Management part.
The fundamental and technical analysis part only accounts for 5 marks of the total of 50 marks.
Additional Resources:
To help you construct your portfolio:
1. Watch this video on how to evaluate stocks using fundamentals: https://www.youtube.com/watch?v=hrs6WhHV12c
2. Watch this video on how to use moving averages to identify buy and sell signals: https://www.youtube.com/watch?v=4R2CDbw4g88
3. Information on value investing can be found here: https://www.investopedia.com/university/stockpicking/stockpicking3.asp
4. Information on growth investing can be found here: https://www.investopedia.com/university/stockpicking/stockpicking4.asp
Futures and Options Data
1. Futures contract on the S&P500 can be found here https://www.marketwatch.com/investing/future/sp%20500%20futures
2. Options contract for, for example, Facebook can be found here https://www.marketwatch.com/investing/stock/fb/options
Other data:
1) Historical stock prices can be downloaded from open access websites like yahoo finance such as the following link:
https://finance.yahoo.com/quote/FB/history?p=FB&.tsrc=fin-tre-srch for Facebook historical prices.
You find a proxy for risk free rate here 3 month treasury bill https://fred.stlouisfed.org/series/TB3MS
2) Annual return of the S&P500 can be found
here https://ycharts.com/indicators/sandp_500_total_return_annual
3) A proxy for risk free rate such as 3 month treasury bill can be found here https://fred.stlouisfed.org/series/TB3MS
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