Investment Strategy Report

The project requires extensive understanding of both conceptual knowledge and application of financial analytics. This project requires each individual student to use more than one but up to four investment assets (stocks and/or stock options) to construct a reasonable investment strategy.

Your analysis should include the following parts:

1. Cover page: show your full name and the course information (term, course number, course section, etc).

2. Introduction: a brief introduction clearly summarizing your trading goal (capital preservation, capital appreciation, current income, total return, etc.) and the strategy designed for this goal. NO longer than one paragraph. NO longer than one page. Of course, you are able to have other goals or combine the goals listed above/below.

  • Capital preservation: investors want to minimize their risk of loss, usually in real terms. They seek to maintain the purchasing power of their investment – the return needs to be no less than the rate of inflation. This is a strategy for strongly risk-averse investors or for funds needed in the short-run.
  • Capital appreciation: investors want the portfolio to grow in real terms over time to meet some future need. Growth mainly occurs through capital gains instead of income like dividends. This is an aggressive strategy for investors willing to take on risk to meet their objective.
  • Current income: investors want the portfolio to concentrate on generating income (such as dividends) rather than capital gains. This strategy suits investors who want to supplement their earnings with income generated by their portfolio to meet their living expenses.
  • Total return: investors want the portfolio to grow over time to meet a future need. This strategy seeks to increase portfolio value by both capital gains and reinvestment current income. It is like a combination of the above two strategies.

3. Strategy analysis: a full analysis showing how you construct your strategy with no more than four assets (stocks and/or stock options). The strategy should not be a simple duplicate of one technique we mention in the lectures. But you are free to combine them together to meet your trading goal. Some examples are:

  • select several stocks based on the Single Index Model, and combine them using portfolio optimization technique;
  • select a stock, simulate its future price, and combine it with its options based on your expectation on the stock’s future price;
  • Other strategies and techniques you have learned from other finance courses are allowed and welcomed.

For your analysis and modeling, asset price information should be obtained from Yahoo! Finance. If you need other financial information, some information sources are EDGAR, FRED, Bloomberg, Google Finance, etc.

In this part, show as many details as possible. The rationale and reasoning for your strategy should be explained clearly and completely. You may want to answer the following questions in your report:

  • what do you expect based on the financial information you obtain
  • why do you think your strategy works for your trading goal
  • under what circumstances you will gain/lose
  • is your strategy able to control the downside risk
  • other questions

In the word/pdf file report, use tables, charts and graphs to help you illustrate your strategy. Screenshots of your analysis in excel is NOT permitted in the formal report.

4. Conclusion: a summary of your strategy and how well it could serve your trading goal. If you have any idea for further research in the future to probably make your strategy better, you may want to mention it here.

5. References: a complete list of all data and information sources.

The analysis in this project should be written up in a formal report in a word or pdf file that should be between (6-8 pages of double-spaced 12 pt Times New Roman text (not including cover page). Set margins to 1’’ for top, bottom, left, and right. This report should be submitted together with an excel file in which your complete modeling and analysis are included.

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