AF3S129 Theory and Practice of Securities Trading

FACULTY:

BUSINESS AND SOCIETY

AF3S129

Theory and Practice of Securities Trading

Dr Jia Cao

Written Assignment One

1 of 2

Completed by student

(if applicable): Completed by student

31^st Jan 2021

26^th Feb 2021

Extenuating Circumstances

If there are any exceptional circumstances that may have affected your ability to undertake or submit this assignment, make sure you contact the Advice Centre on your campus prior to your submission deadline.

Fit to sit policy:

The University operates a fit to sit policy whereby you, in submitting or presenting yourself for an assessment, are declaring that you are fit to sit the assessment.  You cannot subsequently claim that your performance in this assessment was affected by extenuating factors.

Plagiarism and Unfair Practice Declaration:

By submitting this assessment, you declare that it is your own work and that the sources of information and material you have used (including the internet) have been fully identified and properly acknowledged as required[1].  Additionally, the work presented has not been submitted for any other assessment.  You also understand that the Faculty reserves the right to investigate allegations of plagiarism or unfair practice which, if proven, could result in a fail in this assessment and may affect your progress.

Intellectual Property and Retention of Student Work:

You understand that the University will retain a copy of any assessments submitted electronically for evidence and quality assurance purposes; requests for the removal of assessments will only be considered if the work contains information that is either politically and/or commercially sensitive (as determined by the University) and where requests are made by the relevant module leader or dissertation supervisor.

Details of Submission:

Note that all work handed in after the submission date and within 5 working days will be capped at 40%[2].  No marks will be awarded if the assessment is submitted after the late submission date unless extenuating circumstances are applied for and accepted (Advice Centre to be consulted).

You are required to acknowledge that you have read the above statements by writing your student number (s) in the box:

(to be completed by Module Lecturer)

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 finance.yahoo.com for the 5 stocks over the time period from Jan 2015 to Nov 2020.

(Please start this section with brief description of each chosen company and reasons for your company selection.)

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? (session Six)

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. (Session Seven)

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) (Session Seven)

4.     Please demonstrate the risk reduction advantage of diversification. (Session Seven)

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.

(Session Four and Five)

o   Choose a stock and collect data yourself or use the stock and data given to you

o   Form your prediction regarding the future price movement of the stock.

o   Make decision on option trading strategy. (Students who work on your own chosen stock will need to choose an implementation period based on your prediction and prediction horizon.)

o   construct your chosen trading strategy (Students who work on your own chosen stock will need to collect its options’ data online)

o   Analyse the performance of your chosen trading strategy in different price movement scenarios with the payoff/profit diagram.

o   Make a conclusion

(Please note: you are encouraged but won’t be rewarded to choose your own stock and collect data yourself in this section)

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.

o   Is it possible to profit from trading based on technical analysis, if financial markets are “efficient”? please explain. (Session Eight)

o   Is trading based on technical analysis profitable/ Is technical analysis useful for predicting future price movement in practice? Please make your argument based on empirical evidence. (Session Ten)

o   How can behavioural finance explain the possibility of profitable trading based on technical analysis? (Session Nine)

o   Please refer to the literature for empirical evidence, definition of key concepts, etc

Submission

Your report should be 3,000 words (+/- 10%) and the word count, excluding the list of references, should be shown at the end. Your data and calculations should be submitted in an Excel file.

Both the report and the Excel file should be submitted via Turnitin by 23:59 on 31 Jan 2020. Feedback will be available on 26 Feb 2020.

Format and Presentation

ð      Font, Font Size and Spacing

The recommended font is Times New Roman and the recommended font-size is 12. Choose 1.5 line spacing.

ð      Tables, Figures and Equations

Tables and figures shall be numbered consecutively throughout the assignment. For example, Table 1, Table 2, Figure 1, Figure 2 etc.

Equations should be numbered and numbers should be in round brackets at the right hand side of the page and be ordered consecutively throughout the assignment.

ð      Citations and References

Harvard referencing system is required.

Critically appraise approaches to risk management using derivatives and discuss the fundamentals of trading utilising a simulation,

Critically appraise approaches to analysis of empirical data and evaluation of financial investments including portfolios.

§  Stock selection and data collection (5%)

§  Return and risk calculation, performance comparison, and illustration (15%)

§  Correlation calculation, interpretation and explanation (15%)

§  Portfolio analysis (15%)

§  Demonstration of the risk reduction advantage of diversification (5%)

§  Uses of derivatives in trading and risk management (15%)

§  Critical discussion of EMH and behavioural finance on profitability of technical analysis (20%)

§  Format and Presentation (10%)

·       Areas where you have done well:

·     Feedback from this assessment to help you to improve future assessments:

·     Other comments

     Work on this module has been marked, double marked/moderated in 

     line with USW procedures.

(to be completed by student – optional)

In this assessment, I have taken/took note of the following points in feedback on previous work:

Please indicate which of the following you feel/felt applies/applied to your submitted work

·       A reasonable attempt.  I could have developed some of the

sections further.

·       A good attempt, displaying my understanding and learning, with

analysis in some parts.

·       A very good attempt.  The work demonstrates my clear

understanding of the learning supported by relevant literature and scholarly work with good analysis and evaluation.

·       An excellent attempt, with clear application of literature and

scholarly work, demonstrating  significant analysis and evaluation.