Investment: Case Study: BF016 Investments
INSTRUCTOR: Mark Franich
Assessment 1 – Case Study (Individual)
The role of finance is explained through the analyzing of financial to distinguish the different of finance theories. Finance theory including studying the different ways via individuals raise funds and businesses, spend those funds in the most profitable ways, and invest the excess in portfolios that reap the best return while keeping in check the risk factor.
Therefore, the biggest challenges that finance faced is how to invest the funds to generate the required returns. The goals to be achieved from investing vary from individuals to institutions. The decision …show more content…
Risk or Standard Deviation of a portfolio
Standard deviation (sigma, σ) measures the amount of variation or dispersion from the average, and will be discussed shortly.
Covariance calculations are able to help an investor easier to approach insight the stocks in the future. Historical stock prices are used to know if the tends of price to move in same or opposite direction. By extrapolating the historical trend, the potential price movement of a two-stock portfolio can be forecasted.
What Is Covariance?
There are two variables could able to move together via Covariance measures. The variables are usually stock prices for the purpose of this assignment, but they can be anything. (Anonymous)
Calculating covariance of a stock starts with finding a list of previous prices. These are the closing prices of various stocks form stock exchanges. Below is a list:
Day ABC Returns (%) XYZ Returns (%)
1 1.5 2
2 1.8 4.8
3 2.3 5.2
4 1.7 4.2
5 0.5 2.5
Table 1: Daily returns for stocks ABC and XYZ using daily closing …show more content…
While both measures determine whether two variables are negative or positive, the correlation will support more information when two variables move together. The correlation coefficient is always between -1 and 1. If the correlation is 1, the stocks are positive move together, and if the correlation is -1, the stocks are move to opposite direction with negative way. If the correlation is 0, there is random in the moving between two stocks.
The standard deviation of a multi-stock portfolio is calculated via the covariance as well. The standard deviation is the generally accepted measure risks in the finance industry, and it also plays an important role in selecting stocks. A typical investor with traditional finance assumptions of rationality would select stocks that are negatively correlated. This is because if the chosen stocks move the opposite direction, the risk would be low given a level of expected return.
Standard Deviationof a