Investment Analysis: Finance Module Assignment - University

This assignment analyzes investment strategies, focusing on the impact of stock prices, capital markets, and economic events like the COVID-19 pandemic. It explores how stock prices reflect investor information and discusses the importance of cautious long-term investment planning. The assignment covers topics such as shifting purchasing power, short selling strategies, margin calculations, and the role of risk-free assets in creating predictable yield opportunities. It delves into modern portfolio theory, optimal portfolio construction, and capital allocation, including calculating expected returns, standard deviations, and the Sharpe Ratio. The document utilizes several financial concepts and provides examples to illustrate key principles in investment analysis and portfolio management. The assignment is a student submission on Desklib, offering study resources.

Running head: INVESTMENT ANALYSIS
Investment analysis
Name of the student
Name of the university
Student ID
Author note

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INVESTMENT ANALYSIS
1.
a. Stock price reflects an assessment of investors collective information regarding the company’s
present presentation and future forecasts. On the basis of expectation theory, when the
marketplace expects more positive about the firm, the price of share will increase. When it is
necessary to finance the prospective project at the higher price, there will be less shares issued. A
research and development effort or an expansion of operations. When the fewer shares are being
floated then the a smaller portion of profit will absorbed by the new share holders and make the
potential investment more atrractive. Therefore the firm is more inclined to persue the
opportunity. In this current scenario, stock price plays a major role in the “capital market”
economics (Christensen, Hail and Leuz 2016).
The world has become a different place in the last two months, due to COVID19 taking
place as a storm. Investors should be cautious to make a long term goal. It can be suggested not
to rush in “buy in deep strategy” (Sezer, Ozbayoglu and Dogdu 2017). The investors should
remain within the discipline of their assets allocation and use the market falls for the portfolio
rebalancing.
b. In the economical platform, an individual is making more than that they presently wish to
expend. On the other hand, for a retirees, they spend more than they currently receive. Now the
purchasing power (Huang and Yang 2015) can be shifted from the high earnings period to the
low earnings periods of life. There will be one mechanism that save your wealth in the financial
assets, like stocks and bonds. At the time of low earning period, you can get more amount
matching to that time inflation. So our purchasing power will not be downgraded. Therefore by
doing so shift your consumption over the course of your lifetime.

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INVESTMENT ANALYSIS
2.
a. Stock market affected by COVID19 pandemic around the world. Currently the stock of
ABC ltd. is selling for $40 per share, the price of that share was trading at $45 before just
week. Now to take this advantage of this momentum looking at a profit of 5000 dollar,
take a short position of 1000 shares which would get 1000*40= 40,000 and place a buy
order of this same 1000 shares at 35. Therefore buy the shares of 35000.
b. The margin would be called at the value of when the price of the stock would increase,
which means the stock price has to be greater than $40. Hence the current balance in the
margin account is = ($40*1000)+($40000*50%) = $60000.
The margin would be called at the value of $13500, however the current value of equity
is $20000. Thus the rise in share price before the margin call is ($20000-$13500) =
$6500. The per share increase in price is $6500/1000 = $6.5 per share. Hence the share
price at which the margin would be called is = $40+$6.5 = $46.5.
The margin maintenance % is given by Margin Call/ Margin Balance = $13500/$46500 =
29.03%.
3.
a. A risk free assets creats a set of predictable yield risk opportunities that did not exist formerly.
The “trade off” between new risk and profit (Frazier and Liu 2016) is a straight line curve to the
efficient border at the market portfolio with the verticle interrupt at the “risk free rate of return”.
The capital allocation line is the graph of all combinations that would be possible for the risk free

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INVESTMENT ANALYSIS
assets and the risky assets for one depositor. Since it indicates the risk free assets, hence the line
is always be a straight line because it will get no change.
b. In the modern portfolio theory, the portfolio reduces the risk by selecting and reducing the
assets based on statistical tecniques. In case of optimal portfolio (Henríquez et al 2017) will be
very different for the investors. By creating the optimal portfolio, an investor can protect
themselves by loosing money. This can understand by taking an example:
Stocks Cash
Allocation % 60 40
Risk % 80 0
The above example suggests that an investor put his money in shares then he may have to bear
80% risk and ifor cash there will be 0% risk, therefore, stock will give volatile return not liquid
money.
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a. An optimally risky portfolio indicates certain things, investors can expect generally two
types of risk: market oriented risk and business risk. An investor can optimal his portfolio
by combining the risky assets and risk free assets.
Capital allocation simply means that how a company or an investors invest their money
to erarn or maximize their earning, that will increase its efficiency and maximize its
profits.

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INVESTMENT ANALYSIS
The capital allocation is risk reward profile of assets and that can be used to generate
optimal portfolio. The optimal portfolio consisits risk free assets and risky assets where
capital allocation is the efficient frontier.
b. To calculate the risk free rate the expected profit and the standard deviation of the stocks
would calculated which is presented below,
Expected Return = Weight of A* Return A + Weight of B * Return B = 0.5*10% + 0.5*
15% =12.5%
Standard Deviation = SQRT(Weight A* Sd A)+(Weight B*SdB)
+2*wA*Wb*SdA*SdB*R
= SQRT( 0.5^2*5%^2)+(0.5^2*10%^2)+2*0.5*0.5*5%*10%*-1 = SQRT(0.000625) =
2.5%
Using the formula for Sharpe Ratio is the risk free rate is calculated where the Sharpe
Ratio is assumed to be 1.
Risk Free rate = Return – ( Sharpe Ratio* SD portfolio) = 12.5% - (1* 2.5%) = 10%

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INVESTMENT ANALYSIS
Reference
Christensen, H.B., Hail, L. and Leuz, C., 2016. Capital-market effects of securities regulation:
Prior conditions, implementation, and enforcement. The Review of Financial Studies, 29(11),
pp.2885-2924.
Frazier, D.T. and Liu, X., 2016. A new approach to risk-return trade-off dynamics via
decomposition. Journal of Economic Dynamics and Control, 62, pp.43-55.
Henríquez, R., Wenzel, G., Olivares, D.E. and Negrete-Pincetic, M., 2017. Participation of
demand response aggregators in electricity markets: Optimal portfolio management. IEEE
Transactions on Smart Grid, 9(5), pp.4861-4871.
Huang, C.H. and Yang, C.Y., 2015. European exchange rate regimes and purchasing power
parity: An empirical study on eleven eurozone countries. International Review of Economics &
Finance, 35, pp.100-109.
Kaplanski, G., Levy, H., Veld, C. and Veld-Merkoulova, Y., 2016. Past returns and the perceived
Sharpe ratio. Journal of Economic Behavior & Organization, 123, pp.149-167.
Sezer, O.B., Ozbayoglu, M. and Dogdu, E., 2017. A deep neural-network based stock trading
system based on evolutionary optimized technical analysis parameters. Procedia computer
science, 114, pp.473-480.
Siriwardane, E.N., 2019. Limited investment capital and credit spreads. The Journal of
Finance, 74(5), pp.2303-2347.

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INVESTMENT ANALYSIS