Group Assignment | Assessment Report

Group Assignment
Table of Contents
Group Assignment........................................................................................................... 1
Part 1............................................................................................................................ 1
Task 1....................................................................................................................... 1
Task 2....................................................................................................................... 2
Task 3....................................................................................................................... 3
Task 4....................................................................................................................... 3
Part 2............................................................................................................................ 5
Task 1....................................................................................................................... 5
Task 2....................................................................................................................... 5
Task 3....................................................................................................................... 5
Task 4....................................................................................................................... 5
Task 5....................................................................................................................... 6
Task 6....................................................................................................................... 6
Task 7....................................................................................................................... 6
List of reference........................................................................................................... 7
Part 1
Task 1
Risk measurement is a very big component of many sectors operating within the financial
industry. Despite its unarguably important role in sectors such as accounting and economics, the
real effect of the fully precise or perhaps defective risk management is most visible when it
comes to the investment sector. Whether one chooses to invest in bonds or shares, the ability to
predict the direction of a trade can be the difference between profit-making and absolute
bankruptcy. Trade investors and market analysts use a variety of metrics in trying to assess the
probable risk and the likelihood of instability of their prospective ventures but in most cases due
the unpredictable nature of the stock market and its portfolios, market share investors have opted
to use standard deviation to calculate the probability of loss occurrence and the percentage of
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risk using short term data to find long term prediction. This is because standard deviation is a
simple mathematical formula which its first step in calculation requires each item in the list, say
the share amount is subtracted from the overall mean and the respective variance. This leads to
simple values which can be used to determine the variability in the shares since if the standard
deviation values are highly varied it means that investing on the share is risky and if the standard
deviation values are less varied it means that the stock is predictable and investment risk is
lower. According to Brain 2019, in real world finance and stock market, the idea of using
standard deviation is easily applied by generating stock market closing price by adding and
subtracting the standard deviation value from the range. For instance, if a stock has an average
price of 25$ and a standard deviation value of 5$, the easily predicted closing range is between
20$ and 30$ just within 95% certainty percentage. Unlike other known measures of dispersal,
standard deviation is most used since it is measures every asset risk assessment included in the
analysis since it is mean based. It also has the statistical ability to calculate skewness and
correlation effect also.
The chart below show how standard deviation is applied in real world stock volatility estimation.
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Task 2
Correlation is a statistics that shows the relationship between variable or rather statistical items
by demonstrating a linear relationship between variables. Its statistical effect is dependent on the
nature of the correlation which can be positive or negative. A positive relation shows that share
are in tandem while a negative ones speaks the opposite relation. Therefore, when adding a
share to already invested share it means that the overall investment risk being altered also and
adding a share which shows a negative correlation, the volatility of the portfolio calculated by
the standard deviation will ultimately get reduced. Usually correlation is measured in in three
dimensional values: -1, 0 and 1.
-1 is used to imply that perfect negative correlation which means that the data have an inverse
relationship such that as one increases the other one decreases.
0 is used to imply that the variables of interest have no relationship at all.
1 is used to imply that perfect positive correlation which means that the data have a direct
relationship such that as one increases the other one also increases.
So, to answer the question on how adding new shares to a portfolio can affect the risk and return
of that portfolio, we would generally say that, adding an asset with less than perfect positive (1)
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