Technical Trading Methods – Algorithmic Trading – Accounting and Finance Assignment Help

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Assignment Task :
Question 1:  Consider the following Scenario and Questions:
It is Monday morning at Blue Rock Capital and as Head of Trading you are debating the merits of different strategies as promoted by the Heads of various trading Desks, namely Commodities, Equities and Bonds all of whom have different approaches.  As Head of Trading you are sceptical of activist trading strategies and prefer a buy-and-hold strategy.
The Head of Commodities favours Technical Trading Methods and has made the following argument: In the last two years his team have generated an average monthly return of 2% or 24% per year.  According to the Head of Commodities this is proof that Technical Trading works and that there is information in historical prices from which future market directions may predicted.  
The Head of Equities is an advocate for Algorithmic Trading.  Her team has recently developed a model for trading equity shares which they intend to implement with a computer program to ensure consistent and disciplined trading execution.
Computer
 
For your information, in the mode, D/E is the Debt to Equity Ratio and Size is a measured by Sales Revenues and ε is the error term. The model has an adjusted R-Squared of 78%, an F-Statistic of 17.5.  All the independent variables have good t-statistics. According to the Head of Equities the accuracy of the model is shown by being able to explain twenty years of share price movements.
Lastly, the Head of Corporate Bonds is an advocate for Fundamental Analysis…that through examining financial information found in Balance Sheets, Income Statements, etc. of a firm, one may be able to predict future prices.  Research conducted by his Team of Corporate Bonds over ten years showed evidence that the impending costs of bankruptcy were reflected in Bond Yields and thus changes to such costs indicate when the Prices of Bonds may move.  Using this method, the Bond Desk has earned 5% return on Risk Capital in the last two years.

Looking at the evidence provide by the Heads of Commodities, Equities and Corporate Bonds, to what extent do you believe they offer reliable proof for or against the Efficient Market Hypothesis (EMH). What further information might be useful to support your judgements?  Please use relevant readings and literature to support your argument. (20%).

According to Desk Heads, the fact that Traders do make money using trading rules (Technical Trading, Algo Trading or Fundamentals) involving publicly available information shows that financial markets are not Efficient.  According to the Heads, whatever approach is used, it is better than “buy-and-hold” as supported by the Head of Trading. How do you view their argument and how does it compare with the argument made by the Head of Trading? (20%)                                                                  

If the Algorithmic Trading Method were able to consistently earn a 3% profit, adjusted for risk and above normal returns, would this be evidence against the Efficient Market Hypothesis (EMH).  Similarly, is the performance of the Bond Desk’s Fundamental Model performance represent evidence against EMH? (20%)

According to the Head of the Bond desk, using their Fundamental Analysis, they were able to predict the direction of prices (Yields) with a probability of 60% and that this is proof against Market Efficiency.  Do you agree and what level of predictive accuracy must they beat as evidence? (20%)

The Head of Equities has dismissed the Technical Approach used by the Commodities Team as “no better than astrology”; while the Head of Commodities argues that allowing a computer program to find and execute profitable trades eliminates the scope for discretion and human judgement.  In your opinion, who is correct, if anyone? Your answer is expected to demonstrate knowledge and comprehension of relevant theory and the competing trading methods. (20%)

 
 
Question 2:  Consider the following Scenario with Questions
You are a Financial Advisor and are putting together a Bond Portfolio for two different individuals:

Sharon is a thirty-two-year-old solicitor for large firm on a very good income.  Apart from a reasonable mortgage on her flat in Saint Johns’ Wood London, she has few if any financial responsibilities.  She is wondering how to invest her annual bonuses and prefers bonds to equities.

Keith is a fifty-eight-year-old soon-to-be retired dentist. He has paid-off his mortgage and his children are independent. He is a widower.  He is hoping to sell his dental practise to the new junior colleague for approximately £300K.  He is wondering how to invest the windfall and prefers bonds to equities.

As background, you may assume the following:  It is the beginning of January, 2021. The rate of inflation is expected to be 2% throughout this year. But increased government deficits and a stronger economy are expected to push the rate of inflation higher. According to the Bank of England, the inflation rate is expected to be 3% in 2022 and 4% in 2023 and 5% in 2024 and continue at this rate thereafter.  The real rate of interest on Government Treasury bonds is 2% and not expected to change. The maturity premium grows by 10% per annum.  So, for example, as the Treasury rate is 2% in 2021, it is expected to be 2.2% in 2022, excluding the inflation premium.  One Year Treasury Bonds are paying therefore 4%- and Two-Year Bonds, 5.2%.  AA Corporate Bonds have a credit spread of 150 basis points, so for example, if Treasury Bonds are paying 4% in 2021, then AA Bonds have a Yield of 5.5% and 6.7% in 2022.  
 
 
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