Finance Investment Risk Analysis

Finance Investment Risk Analysis

Locate and analyze an article on a financial topic or current financial event that interests you. Summarize the article and support your observations with evidence from research and the readings.

Analyze an article on a financial topic or current financial event

Locate and analyze an article on a financial topic or current financial event that interests you.
Summarize the article and support your observations with evidence from research and the readings.
You can also use any financial websites along with any sources such as journals, textbooks, and newspapers such as the Wall Street Journal, etc.
Also, feel free to discuss any topic in the world of finance even though we may not have covered it or it is not covered in the text. Finance is a very broad topic so you can write on many topics such as a particular.

Your assignment should be a minimum of 500 words. A title page and executive summary are not required. Be sure to use APA format when citing your reference. (Note: Please do not use Wikipedia articles).
Submit your Article Review in this public thread so that your course-mates can read and comment.

 Week 4: Lecture – Lesson Videos

Risk and reward is a relationship that makes intuitive sense, even if you haven’t put it into words.  The following video reviews the concepts of risk and reward and very clearly explains why investment opportunities with higher variance (or volatility) are considered riskier and must offer a higher reward to pursue.

https://youtu.be/xAWxKk9tUME

A portfolio is a group of investments and most investors invest in a portfolio of stocks so they “don’t put all their eggs in one basket”.  In other words, they spread their risk across multiple investments.  The ideal portfolio includes investments with different patterns of volatility so that risk is minimize .

The graphs in the following video provide a visual image of this concept.  Take a look.  The British accent will be a change of pace! A portfolio is a group of investments and most investors invest in a portfolio of stocks so they “don’t put all their eggs in one basket”. In other words, they spread their risk across multiple investments.

However, care should be given to the pattern of volatility follow ed by each type of investment.  If all investments follow similar patterns, an investor hasn’t diversified her portfolio. The ideal portfolio includes investments with different patterns of volatility so that risk is minimize.  The graphs in the following video provide a visual image of this concept.  Take a look.  The British accent will be a change of pace!

https://youtu.be/QJnnpX5o-ko

Calculating the Standard Deviation of a Two Stock Portfolio is a way to prove that investing in more than one stock i.e. diversifying your portfolio will reduce financial risk.

 Week 4: Lecture – Lesson Videos

For example, assume you have a list of all the stock prices of Company A for over a year.  Using all the prices, you can calculate their average well as the standard deviation.  The standard deviation (SD) is a reflection of how far the actual prices deviated from the average, or in other words, the amount of volatility in the stock price.  A high standard deviation means there was greater volatility, i.e. variability in the stock prices, than the volatility of stock prices with a low standard deviation.  Therefore investing in a stock with a higher SD is riskier than investing in a stock with a lower SD.

But didn’t we say that we want to invest in more than one stock to further minimize risk? Yes, we did! Below find a video that calculates the risk associated with a two stock portfolio (for simplicity) by computing the standard deviation of the portfolio. You won’t be responsible for the calculation itself. However, notice that the SD of only Stock A and the SD of Stock B are both higher than the SD of the portfolio.  If an SD is a measurement of risk, then the calculation shows the risk of the portfolio is lower than the risk of investing in the individual stocks.  So diversification lowers the risk of investing the same dollars in only one of those stocks.
https://youtu.be/sHEA73iz_Io