Investments and Portfolio Management: sample paper

 

 

Introduction

This study aims to provide an evaluation of the portfolio management in which I have invested $1 million of stocks in the American Stock Exchange. It is worth noting that due to integration of business activities and growth of online connectivity, forex trading has been increasing tremendously which in turn has led to development of business activities. Stock exchange markets has been in the forefront in providing effective forex trading (Carpentier & Suret, 2017). This involves buying and selling stocks and shares at a certain rates. In this study, I have invested $1 million for a period of four weeks which has led to the production of variable of profits depending on the trading day. The trading has shown an increasing trend of profit margin for the period of trading. Due to the increase of American dollar value, the rate of stock has been increasing significantly which in turn translates into a significant profit generation.

Portfolio strategy and outcome

It is prudent to note that the most common basic concept for the stock market is the idea that each share of stock shows a small portion of ownership of the corporation. The Investopedia provides a basic platform for the stock trading which in turn has led to the development of forex trading. The concept used in the stock market involves buying the stocks when its value is relatively low as compared to the market price and then selling them when the price is high as compared to the buying price for the stocks (CFI, 2018). The following table shows the outcome from the Investopedia stock trading from week 3 to week 7

Day week 3 week 4 week 5 week 5 week 6 week 7
Mon 1,000,000 1,000,245 1,000,500 1,000,850 1,001,850 1,003,600
Tue 1,000,050 1,000,265 1,000,570 1,000,900 1,002,000 1,003,950
Wed 1,000,075 1,000,300 1,000,620 1,000,945 1,002,150 1,004,100
Thu 1,000,100 1,000,340 1,000,650 1,000,985 1,002,350 1,004,350
Fri 1,000,145 1,000,380 1,000,700 1,001,200 1,002,650 1,004,750
Sat 1,000,175 1,000,420 1,000,750 1,001,350 1,002,850 1,005,000
Sun 1,000,200 1,000,460 1,000,800 1,001,650 1,003,200 1,005,450

 

From the outcome of the trading above, it can be noted that the value of the stock profit was increasing significant in every period of trading. Taking week 3 as the basis, it can be noted that the initial value was $1 million and at the end of the trading period at week 7, the value of the stock was 1,005,450. The trading also shows that the profit was increasing exponentially in every week from Monday to Sunday. This is attributed by increase of the dollar value in relation to other local currencies. Increase of business activities and flow of money within the economy also has a great influence on improving the forex trading. The following chat shows the increase of the stocks revenue in every week for the 5 weeks under evaluation

From the above chart, it can be shown that the stock values has been increasing exponentially for the entire period of trading. This implies that the rate of trading has a tendency of increasing as long as the dollar value is high as compared to the local currencies. However, reduction of the dollar value beyond the local currency has a tendency of reducing the profit margin among the forex traders.

The following table shows the values of arithmetic mean and standard deviation for the stock values obtained from the Investopedia investment

Day week 3 week 4 week 5 week 5 week 6 week 7
Mon 1,000,000 1,000,245 1,000,500 1,000,850 1,001,850 1,003,600
Tue 1,000,050 1,000,265 1,000,570 1,000,900 1,002,000 1,003,950
Wed 1,000,075 1,000,300 1,000,620 1,000,945 1,002,150 1,004,100
Thu 1,000,100 1,000,340 1,000,650 1,000,985 1,002,350 1,004,350
Fri 1,000,145 1,000,380 1,000,700 1,001,200 1,002,650 1,004,750
Sat 1,000,175 1,000,420 1,000,750 1,001,350 1,002,850 1,005,000
Sun 1,000,200 1,000,460 1,000,800 1,001,650 1,003,200 1,005,450
Average 1,000,106 1,000,344 1,000,656 1,000,656 1,001,126 1,004,457
S. Deviation 65.99319693 74.18262077 96.04420751 269.9527547 450.962689 597.2727132

 

From the above table, it can be noted that the values for arithmetic mean and standard deviation for all the period was increasing significantly from week 3 to week 7. This implies that the value of stocks keeps increasing during the period of training which in turn prompts to the increase of profit generated from the trade. Therefore, it can be noted that average value for the whole trading has increased as compared to the initial investment value of $1 million.

Approaches of evaluating the investment performance

One of the significant approach of evaluating the investment performance is the use of the total risk portfolio. This is achieved by computing a weighted average for the total risk which can be measured in terms of standard deviation for the people’s investment of the portfolio  (ACCA, 2018). The following formula is used in computation of the total risk portfolio

To calculate the value of

= 450) +1001126(450) +1004457(597)

24,007.87

The above figure shows that the stock investment in Investopedia has a total risk portfolio of $24,007.87. This can be attributed by the improvement of dollar value as compared to the local current. The stability of the dollar value as well as local currency and also economic stability has a great influencing of enhancing a big potential of generation of profit from the investment. The big risk portfolio value obtained can also be attributed by the fact that during the period of investment, there was influx increase of the dollar value as well as economic stability which in turn enhanced generation of high profit.

Another significant approach of measuring the investment performance is by the use of residual risk. This is computed by calculating the inherent risk then subtract mitigation control and the control instance values (Grafx, 2018). The residual risk plays an essential role in reducing the risk rating to assume the residual risk value. The following formula shows the process of computing the residual risk

It is prudent to note that the inherent risk is the total value at the end of investment while the combined risk is the value of the stock at the start of investment. Therefore, to compute the residue risk;

1,004,457-1,000,000 = $4,457

The above computation shows that the stock investment in Investopedia has a residual risk of $4,457 and hence the chances of getting loss is very limited.

The following trap of the CML shows the total risk and the location of the portfolio

The portfolio is shown in the bottom which implies that there is a state of incensement of the investment returns with time which results from the increase of the dollar value as well as stability of economy in the financial world.

 

Sharpe ratio

The Sharpe ratio is used to compute the return of the investment based on the risk of the investment. It is the average of the returns which are earned from the total risk (Sharpe, 1994). The following formula is used for the computation of the Sharpe risk

Where

Return of the portfolio

The risk free rate of the portfolio

= is the standard deviation

= 0.81

The above chart shows the portfolio’s characteristic line which identifies the returns of the portfolio in every week. From the graph, it can be noted that the returns of the investment were increasing exponentially in each week and the value of the return increased from week 3 all through to week 7. From the chart above, it can be noted that the last week recorded a highest value of the investment returns. However, the first week registered a low revenue due to instability of the dollar value which increased its value as the time progressed. The analysis shows that the increase of the dollar value as compared to the local currency has a great tendency of registering a high revenue from the stock trading.

Conclusion

In conclusion, it can be noted that the Investopedia investment which involved buying and selling of stock incurred a significant profit for the period of investment. The investment took place from week 3 to week 7 in which the return of the investment increased exponentially from the first week to the last week. The results can be attributed to various factors. Firstly, during the period of investment, the value of dollar increased as compared to the local currency which in turn led to high profit generation. Secondly, economic stability which reduced the chances of currency fluctuation as well as stability of the financial market enhanced the increase of stock value and hence registering high profit margin.

 

 

 

References

ACCA. (2018). The risk and return relationship part 2 – CAPM. Retrieved from https://www.accaglobal.com/lk/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/risk-return.html

Carpentier, C., & Suret, J. M. (2017). Stock exchange markets for new ventures. Journal of Business Venturing, 25(4), 403-422.

CFI. (2018). Stock Market: Public markets for issuing, buying, and selling stocks. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/stock-market/

Grafx. (2018). Residual Risk Calculation. Retrieved from https://platform.igrafx.com/doc/user-guide/modeling-in-the-igrafx-platform/enterprise-objects-and-folders/risk-risk-instance/residual-risk-calculation

Sharpe, W. F. (1994). The sharpe ratio. Journal of portfolio management, 21(1), 49-58.

 

 

 

 

 

Appendix

Trading summary obtained from your ‘Investopedia

Day week 3 week 4 week 5 week 5 week 6 week 7
Mon 1,000,000 1,000,245 1,000,500 1,000,850 1,001,850 1,003,600
Tue 1,000,050 1,000,265 1,000,570 1,000,900 1,002,000 1,003,950
Wed 1,000,075 1,000,300 1,000,620 1,000,945 1,002,150 1,004,100
Thu 1,000,100 1,000,340 1,000,650 1,000,985 1,002,350 1,004,350
Fri 1,000,145 1,000,380 1,000,700 1,001,200 1,002,650 1,004,750
Sat 1,000,175 1,000,420 1,000,750 1,001,350 1,002,850 1,005,000
Sun 1,000,200 1,000,460 1,000,800 1,001,650 1,003,200 1,005,450