Portfolio Investment and Trading Risk Management: A Study on Desklib

This report discusses the creation of a profitable portfolio involving six different types of stock, calculating average weekly rate of return, standard deviation, and correlation coefficient. It also evaluates the risk reduction advantage of diversification and discusses trading risk management. The report concludes with an analysis of EMH and behavioural finance in support of the portfolio.

ESSAY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
SECTION A.....................................................................................................................................3
Calculating average weekly rate of return, standard deviation and its interpretation.........................3
Calculated weekly rate of return correlation coefficient within the stock..........................................6
Forming an equally weighted portfolio consisting of two stock with lowest correlation coefficient. 8
Risk reduction advantage of diversification.......................................................................................8
Section B...........................................................................................................................................9
Section C.........................................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
The portfolio investment is being referred to as the passive investment relating to
different securities which is done in a combination and is expected to earn good returns. For
the investor to gain maximum output, it is necessary that the portfolio must be good and
profitable so that good returns can be expected. In the present report the six different types of
stock will be used and their return will be calculated. Along with this the trading risk
management that is selection of good option trading strategy will be discussed. In the end
discussion relating to EMH and behavioural finance will be done in support of the portfolio
will be analysed and evaluated.
SECTION A
In the current case, the portfolio is being created involving the different types of stock
being traded. For earning good amount of profit it is necessary that the portfolio is selected
very wisely. The reason underlying this fact is that the portfolio involves many different
types of stock and in case one is not working profitably then other will. Hence, because of
this reason the portfolio is being created by taking six different companies from six different
segment. These company involved Barclays from banking industry (Alam, Wei and Wahid,
2021), Cineworld from entertainment industry, National Express from public transport
industry, Rolls Roys from automobile industry, Superdry with clothing company and Tesco
the retail sector.
Calculating average weekly rate of return, standard deviation and its interpretation
BARCLA
YS (BCS)
CINEWOR
LD (CINE)
NATION
AL
EXPRESS
(NEX)
ROLLS
ROYS
(RYCE
Y)
SUPERD
RY
(SDRY)
TESC
O
Mean 0.0047 0.0013 - 0.0000 - 0.0076 0.0041
0.00
26
Standar
d
0.0761 0.1765 0.1107 0.1350 0.1370 0.04

deviatio
n 26
R-V
Ratio 0.0618 0.0073 - 0.0003 - 0.0561 0.0299
0.06
08
Date 1/13/2020 4/6/2020 6/29/2020 9/21/2020 12/14/2020 3/8/2021 5/31/2021 8/23/2021 11/15/2021
-0.3000
-0.2000
-0.1000
-
0.1000
0.2000
0.3000
BCS WEEKLY RATE OF RETURN
The weekly rate of retrun is witnessing an upwaard or dowfall trend. The nature of
stock market allow the inevstors and market to face the constant upward and downfall trend.
The higesyt possible value is in between .2 to .3 sanf lowest possible is in between -.2 to -.3.
04/11/2019
08/12/2019
11/01/2020
14/02/2020
19/03/2020
22/04/2020
26/05/2020
29/06/2020
02/08/2020
05/09/2020
09/10/2020
12/11/2020
16/12/2020
19/01/2021
22/02/2021
28/03/2021
01/05/2021
04/06/2021
08/07/2021
11/08/2021
14/09/2021
18/10/2021
21/11/2021
-0.6000
-0.4000
-0.2000
-
0.2000
0.4000
0.6000
0.8000
1.0000
WEEKLY RATE OF RETURN

The weekly rate of retrun of the stock is determine as highest in .8 to 1 and lowest
approximately -.4.
04/11/2019
08/12/2019
11/01/2020
14/02/2020
19/03/2020
22/04/2020
26/05/2020
29/06/2020
02/08/2020
05/09/2020
09/10/2020
12/11/2020
16/12/2020
19/01/2021
22/02/2021
28/03/2021
01/05/2021
04/06/2021
08/07/2021
11/08/2021
14/09/2021
18/10/2021
21/11/2021
-1.0000
-0.5000
-
0.5000
1.0000
1.5000
WEEKLY RATE OF RETURN
The highest value is determine as 1 to 1.2 and lowest identify as -.6.The trend is keep
in fluctuating that certainly create an uncertainity in the market and stock prices.
04/11/2019
08/12/2019
11/01/2020
14/02/2020
19/03/2020
22/04/2020
26/05/2020
29/06/2020
02/08/2020
05/09/2020
09/10/2020
12/11/2020
16/12/2020
19/01/2021
22/02/2021
28/03/2021
01/05/2021
04/06/2021
08/07/2021
11/08/2021
14/09/2021
18/10/2021
21/11/2021
-0.6000
-0.4000
-0.2000
-
0.2000
0.4000
0.6000
0.8000
1.0000
WEEKLY RATE OF RETURN
Te stock price is fluctuating in beytween .8 to -.4. The prices flow in between this
value.

04/11/2019
08/12/2019
11/01/2020
14/02/2020
19/03/2020
22/04/2020
26/05/2020
29/06/2020
02/08/2020
05/09/2020
09/10/2020
12/11/2020
16/12/2020
19/01/2021
22/02/2021
28/03/2021
01/05/2021
04/06/2021
08/07/2021
11/08/2021
14/09/2021
18/10/2021
21/11/2021
-0.6000
-0.4000
-0.2000
-
0.2000
0.4000
0.6000
NEX WEEKLY RATE OF RETURN
The prices fall in between the .6 and -.6. The constant fluctuating trend is witnessed but the
majority of the time market witness positie movement in value.
04/11/2019
11/12/2019
17/01/2020
23/02/2020
31/03/2020
07/05/2020
13/06/2020
20/07/2020
26/08/2020
02/10/2020
08/11/2020
15/12/2020
21/01/2021
27/02/2021
05/04/2021
12/05/2021
18/06/2021
25/07/2021
31/08/2021
07/10/2021
13/11/2021
-0.3000 -0.2500 -0.2000 -0.1500 -0.1000 -0.0500 - 0.0500 0.1000 0.1500 0.2000
WEEKLY RATE OF RETURN
The rate is keep on fluctuating this week.
Calculated weekly rate of return correlation coefficient within the stock
For the portfolio to be successful it is necessary that proper combination of different
stocks is essential to be made. The reason pertaining to the fact is that in case the combination
of different stock will not be providing better result than the portfolio will not be good and

this will be affecting the returns to a great extent. thus, with the help of the use of correlation
tool it will be beneficial for the company or investor to analyse that which pair of stock will
be providing better results (Vaidya, 2021). The correlation is a tool which assist in evaluating
the relation between two or more stocks. Hence, in case the correlation will be high between
the two stocks then this implies that the returns will be provided high by that combination of
stock. On the other hand, in case the correlation is low then this indicates that the portfolio
involving those two stock will not be providing good results.
BCS CINE NEX RYCEY SDRY TESCO
BCS 1
CINE
0.55584446
6 1
NEX
0.74437789
3
0.4832718
4 1
RYCEY
0.54985257
4 0.3013557
0.4451
9 1
SDRY 0.653128
0.6420980
9
0.6035
7
0.410672
2 1
TESCO
0.26263532
6
0.1741438
5 0.2134
0.226930
6
0.220891
6 1
On the basis of the above correlation matrix it is clearly visible that the highest correlation
being present is between BCS and NEX. This simply implies that in case the portfolio
consists of Barclays bank and National Express then this will be resulting in more return to
the company or the investor. This also implies that correlation is high that is increase in price
of BCS will also result in increase in price of NEX. This is because of the reason that this is
high correlated that s 0.744 or 74.4 %. Hence, as a result of this, investor will be earning
more profit with the help of this combination within the portfolio (Saeed, Bouri and
Alsulami, 2021). There can be many different factors which may have driven the return
correlation within these two stock. These factors are as follows-

The first and foremost factor that affect the correlation among the stock is the
proportion of investment. This is the factor affecting because in case the proportion of
investment is not effective then the correlation will be affected. For instance, BCS is having
90% investment whereas NEX has 10 %. Then in this situation, the changes in price of NEX
will not be having major impact over the prices of BCS.
Along with this, another factor is that the prices of the stock are totally dependent on
the market condition. Hence, it is not necessary that in case banking industry is working
better than the public transport industry will also be working in good condition. Thus, this
can also affect the level of correlation between both those stock and ultimately the over
portfolio.
Forming an equally weighted portfolio consisting of two stock with lowest correlation
coefficient
The two stock consist the lowest correlation coefficient is Tesco and RollsRoyas.
Both the companies hold the lowest possible cpoporelayioon coefficient and the standard
deviation identify of such stocks are 2.64 of Rolls Royas and 17.64 of the Tesco Company.
The return of the standard deviation clearly indicates that the Tesco Company will generate
better expected return in comparison to the Rolls Royas Company. The equally weighted
portfolio combine both the stock hold the equal value. Stock is completely unpredictable in
nature which does not allow the stock to always fall or rise (Gil-Alana, Abakah and Rojo,
2020). Many cases have witnesses where the stock rises from bottom to the all different level
which allow the investors or traders to gain healthy return over the investment is made.
Risk reduction advantage of diversification
The risk reduction is the advantage which is enjoyed by the company because of the
diversification within the portfolio. The reason pertaining to the fact is that in case there is
diversification within the asset or stock then the return will be more. In the present portfolio
the investment is being done in 6 different stock belonging to different industry. In case one
of the industry is not working well then the company will be having profit from the other
stocks. Hence, because of this the risk is reduced because of diversified portfolio. For
instance, the investment is being done on one stock only and that company does not perform
well then whole investment will provide loss (Tao and et.al., 2021). On the other hand, the
total investment amount is invested in 5 to 6 stock then at least some of the stock will provide
profit. Thus, overall the company will be earning good amount of profit which is beneficial

for the investor. For example, a total of £50000 is being invested in Tesco and for some
reason the performance of company declined than the investor will be facing loss. On the
other hand, suppose the investor invest £20000 in Tesco, £10000 in National Express, £15000
in Barclays and £5000 in Superdry. Then in this situation even if Tesco is facing loss then
also the overall portfolio will not be providing loss. This is because of the reason that only
£30000 is invested in Tesco and remaining amount is being invested in other asset which will
provide profit to the investor. Hence, this diversification of portfolio provides the advantage
of risk reduction which is beneficial in earning good amount of profit on the portfolio.
Section B
Covered call is one of the most prominent option trading strategies that can be used to
minimise the risk in stock trading. This strategy allow the investor to get the fixed price over
investment is made. Stock market is highly risk generating market that involve certainly
determine in the face of risk. The future price movement in stock market is predicted to be in
a upward direction (Wagner, 2020). In such a time this is a suitable practice that secure a
certain value against stock is sold in market. This strategy allows investor securing a certain
value over the stock is invested. The future price movement is expected to rise in positive
direction still due to the risk involve in stock trading this is a suitable practice that can be
taken to overcome the effect of risk factor included with stock trading.

The above mentioned diagram clearly state that profit and payoff is rising at the time
of maturity. This is a safe where profits will generate and prices will hike that would certainly
provide an advantage to the investors. This option will allow the investors a secure return in
case of any scenario (Rossi and Gunardi, 2018). If the stock price rises than this option will
allow the investor to earn profits by entertaining the advantage of rising stock price. In the
opposite situation where the stock prices are falling this option will allow the investor to
secure a certain price of the stock which will be secured irrespective to the any given
situation of stock in market. Henceforth, the investment is found to be the most secured in
case of covered call. The term itself denotes the fact that this practice is favourable enough to
cover a certain price or value against investment is made in the stock (Monasterolo and De
Angelis, 2020). The market is highly uncertain which allow the investors to utilise and
explore this option of investment where they get to secure a certain value of stock which can
further be secured irrespective to any market situation. Stock market is very open to move
towards any direction and in such a situation this option of stock investment allow the
investors to secure the market downfall and make a profitable investment option in long put.
Profit in this option is based on the market situation if market fall than profits will also
decline and in case the market is rise than this would certainly increase the profits against
investment is made in stocks.
Section C
In case financial market is efficient enough that the trading firms and the stock trader
get more opportunities to earn profits. Technique analysis is a professional practice and
approach that is followed to monitor and evaluate the performance of stocks. The entire
practice of technique analysis is about to evaluate the overall performance of the stock in
respective target market. Efficient market is denoted as all such market that contain great
possibility for the traders to make profits out of investment. Technical analysis combine with
the efficient market to generate healthy and effective return over investment is made in the
market. In the time of market efficiency more possibilities arrive to earn healthy return as the
market is constantly raising that provide a better opportunity to the traders and the whole
market to gain potential revenue and profits (Chaffai and Medhioub, 2018). In the situation of
market efficiency indicate the fact that the trader holds he better opportunity to hold stocks
for a longer time frame. Generally the trader does not hold stock they buy and sale the stock
on the same day or day after based on the market situation. Traders do not follow the policy
to invest they just make a trade out of putting money into the stock market. The efficient

market situation favours the trader to buy more stocks and sale at the same time so that due to
the fact that market is efficient enough and rise which could allow the trader to generate
profits in the market. Market efficiency is based on how business environment is performing
and how effectively the stock market is funding return to the investors. Irrespective to the
crisis situation technical analysis always find the market to be effective enough as always
certain stocks carry the ppositon to generate and make a profitable return in stock market
trading.
The role of technical analysis is to predict the position of the stock market on the basis
of trading discipline which further direct with all potential investment opportunity sustain in
the market. This entire practice of technical analysis is well supportive for the trader to assess
the movement of stock market and identifying a predictable stock position in respect to a
certain time frame. The role of the technical analysis is very critical to establish a proper
prediction in respect to the long term as well short term financial position of the stock. The
technical analysis comprises with all the various technicalities such as rate of return on
investment, cost of capital, level of risk involve in security and so many technical
terminology. This entire practice of technical analysis is well suitable to predict the future
trading movement of the stock in market. The idea of using this technology is to predict the
possible future price of the stock and identify the right movement that will witness in the
stock price and its valuation (Spulbar and et.al., 2019). The reason behind following the
practice and technique is to determine the potential value and price of the stock in future or at
a given point of time. The professional follow the practice of technical analysis is to predict
the future stock price or the movement of stock market. This is important for the professional
to determine the stock movement to identify the actual positon of the stock in respective
target market. Stock market is very unpredictable which require a proper technicalities to be
analysed and assessed in order to take clear and evident prediction about which stock to
invest and which stock to release at a certain point. Future price of any stock is hard to
identify but on the basis of the movement of stock market the possible value of stock is
identify in technical analysis practice. Professionals and traders make the decision related to
trading in stock on the basis of the expected values of stock determine with the use of
technical analysis practice.
Behaviour finance is about to analysis the behaviour of the market. Technical analysis
on the other hand makes any prediction on the basis of the technical terminology that allows
the investor to determine the predicted value of the stock in future. Behaviour analysis on the

other side evaluates the nature of the whole market and expected future situation that may
result into the rise or decline of the market (Zahera and Bansal, 2018). Trader analysis the
market with the use of both the techniques that include behaviour finance as well technical
finance to identify the trading decision. Behaviour finance is a most prominent concept along
the line to the technical finance to take the trading and buying decision related to the stock.
Investors use both the techniques such as behaviour finance as well technical finance to take
the stock related decision. Many times even if the technical analysis predict that the stock
price are declining on a regular basis but due to the behaviour finance approach investor hold
the stock due to the future possibility ad expectations that market will grow and investor end
up earning heavy return on the stock. Role of the behaviour finance is very crucial while
making the investment and trading decision as the stock market is very complex where
number do not portrait the real situation many times. Behaviour finance allow the trader to
understand the behaviour of the market and based on the prediction resulted the inventors and
trader get to make the most suitable decision to invest in the stock.
Yousaf, Ali and Shah (2018), has mentioned in the study that recommended books are
the literature presented over the stock trading that allow the investors to gain an appropriate
knowledge and information over the nature and behaviour of the stock market. This is
comprises with the behaviour finance and the technical analysis that is used to make the
buying decision of the stock. Studios allow the trader and investor to collect the effective
bunch of knowledge that can favour the trader and investor to take a suitable investment
decision Behavioural finance is a suitable basis to invest in the market on the basis of the
behaviour aspect of the stock market. In this the nature of the stock market is analysis so that
proper movement in stock can identify by the professional. Behaviour finance allows the
investor to also consider the behaviour aspect of the stock market when it comes to making
an investment decision.
Shah, Ahmad and Mahmood (2018), has criticised that literature only provide the
theoretical background and context of the stock market. On the other side stock market and
its nature is immensely based on how the whole market behave and businesses are getting
returns. Practical knowledge and understanding play a crucial role for the traders and investor
to make a suitable investment decision.

CONCLUSION
Rate of return is a term that is used to determine the rate at which return is generated
by the firm. This is a return on which trader and investor generate over making an investment
in the stock. Risk management is about to assess and verify the level of expected risk
associated with investment in stock. This identify with the support of movement of stock
prices. Covered call is a suitable trading strategy that can be used to secure the investment
made in stock. Technical analysis is a practice followed by trader and investor to identify the
technical aspect of the stock before masking any buying decision. Behaviour finance is about
to understand the behaviour of the market and based on the behaviour identified this involve
making buying decision. The practice of behaviour finance allows the investor and trader to
monitor the overall behaviour of the stock market and make suitable decision.

REFERENCES
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Wagner, A. F., 2020. What the stock market tells us about the post-COVID-19 world. Nature
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