Investment and Risk Management Assignment Help

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Qualification - OTHM Level 6 Diploma in Accounting and Business

Unit Name - Investment and Risk Management

Unit code - H/617/4379

Unit Level - Level 6

Assignment Title - Investment and Risk Management

Unit Credit - 20

Learning outcome 1: Understand the principles of financial market trading and investment

Answer: Understanding the principles of financial market trading and investment involves recognizing that these markets are marketplaces where various financial instruments like stocks, bonds, currencies, and derivatives are bought and sold. A core principle is the interplay of supply and demand, which fundamentally drives asset prices. Successful engagement requires a dual approach: trading generally focuses on short-term price movements to generate quick profits, often employing technical analysis and strict risk management, while investing typically involves a long-term perspective, aiming for capital appreciation and income through fundamental analysis of sound companies or diversified portfolios. Key considerations for both include managing risk through strategies like diversification and stop-loss orders, understanding market cycles, and controlling emotions like fear and greed that can lead to impulsive decisions. Furthermore, being aware of costs and taxes, staying updated on news and events, and recognizing one's own risk tolerance are crucial for navigating these complex and dynamic environments.

Learning outcome 2: Understand the theory of financial market trading and investment

Answer: The theory of financial market trading and investment is underpinned by several key concepts, with the Efficient Market Hypothesis (EMH) being a cornerstone. EMH posits that asset prices fully reflect all available information, making it impossible to consistently "beat the market" through either fundamental or technical analysis, unless one possesses inside information (which is illegal). This theory comes in weak, semi-strong, and strong forms, depending on what type of information is reflected in prices (past prices, public information, or all information including private). Complementing EMH, the Random Walk Theory suggests that stock price movements are random and unpredictable, implying that past price patterns offer no reliable guide to future movements. However, a significant counterpoint to these rational market theories is Behavioral Finance, which integrates insights from psychology to explain how human emotions, cognitive biases (such as overconfidence, loss aversion, and herd mentality), and irrational decision-making can lead to market anomalies, bubbles, and crashes, challenging the notion of perfectly efficient markets and providing avenues for informed investors to potentially capitalize on these behavioral inefficiencies.

Learning outcome 3: Understand risks associated with market trading and investment

Answer: Financial market trading and investment inherently involve various risks that can significantly impact returns and even lead to capital loss. Market risk (or systematic risk) is the most pervasive, referring to the possibility of investments declining in value due to factors affecting the entire market, such as economic downturns, changes in interest rates, political instability, or major global events. This includes interest rate risk (for fixed-income securities), equity risk (for stocks), and currency risk (for international investments). Beyond systematic risks, unsystematic risk (or specific risk) relates to factors unique to a particular company or industry, such as poor management, product recalls, or increased competition, which can often be mitigated through diversification across different assets, sectors, and geographies. Other crucial risks include liquidity risk, the difficulty of selling an investment quickly without significant price concessions; credit risk, the possibility of a borrower defaulting on debt payments (relevant for bonds); and inflation risk, where the purchasing power of returns is eroded by rising prices. Finally, behavioral risks, stemming from emotional and irrational decision-making, can lead to impulsive actions that deviate from a sound investment plan. Effectively managing these risks through strategies like setting stop-loss orders, proper position sizing, and maintaining a disciplined approach is paramount for long-term success.

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Aim: The aim of this unit is to provide learners with an understanding of the different trading and investment techniques and consider how these are used in practice. As part of the unit, learners will consider the risks associated with market trading and investment and how these risks can be mitigated.

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LO1

Financial Markets - derivatives, capital, money, forex, insurance markets.

Foreign Exchange Markets - size and location of the foreign exchange markets. Major commodity markets. Gold trading and links with currency and stock market trading. Worldwide Oil Trading.

Stock Market - stock market structures - Futures and Over the Counter Market Structures.

Economic and Political Events - to include macro and micro economic factors. Review of major political events. Analysis of the effect of recent political and economic events on financial markets. Consideration of the possible effects of future political and economic events on financial markets.

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LO2

Human Psychology - human psychological biases (herd instinct, self-rating/self-attribution, confirmation bias, availability bias). Reasons for traders to take early profits or their reluctance to cut losses. The efficient market hypothesis. Behavioural finance - overconfidence in traders, regret and pride (including snake-bite effect), familiarity, mental accounting, anchoring, endowment effect, disposition effect, loss aversion.

Chart Analysis - Dow theory, Bull-Bear market cycle, Japanese Candlestick patterns and Fibonacci retracements.

Technical Analysis - Moving averages, price momentum and volume and STEM trading approach. ADX, DMI and the Holy Grail trading strategy.

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LO3

Risks - categories of risk (market, investment, trading).

Ways to mitigate risks - risk avoidance (e.g. choosing less risky stock); diversification; limiting risk; market analysis.

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