UMADQG-30-3 Strategic Project in Accounting and Finance
UMADQG-30-3 Strategic Project in Accounting and Finance
Final Report
FINAL AGREED MARK
(As a result of discussion between the first and second marker) 25
Student Name Wan Bin Wan Zuhairi
Student Number 21053281
First Marker Name John Bray
Second Marker Name Maksud Onal
Subject Field Accounting and Finance
Marking criteria and grading
The following guidelines attempt to clarify the characteristics that markers should look for to give a particular grade. It should be remembered that there may be significant variation in the quality of work within a classification.
Markers should consider the criteria on the next page and consider the extent to which these have been met using the following grading:
80%+ Outstanding; all key points (and some others) met and leaves little scope for improvement.
70-79% Excellent; covers all key points clearly and thoughtfully and is generally accurate.
60-69% Very Good - Good; meets many of the key points some often well, although some points could be developed.
50-59% Average: meets many of the key points but is rather sketchy at times and arguments/material require development.
40-49% A pass: meets sufficient of the key points to merit a pass, but the material is very thin or given limited consideration, at times muddled.
Below 40% Referred: addresses few (if any) of the key points, inadequate understanding, and insufficient development of material and/or inclusion of largely irrelevant material.
Detailed Marking Grid
Fail Pass Average Very Good Excellent Outstanding
0-39% 40-49% 50-59% 60-69% 70%+ 80%+
Background and rationale for the project (10%) The choice of the topic is not explained or only indicated on a superficial level. No mention of why the project is important to carry out/relevant. Rationale unclear and muddled writing. A basic explanation for topic choice is available. Relevance/background and why the project is needed are stated but do not emerge from arguments. Overall vague and shows little understanding. An adequate explanation for topic choice is given. Some use of arguments for why the project is needed. The choice of the topic is explained, and the background is discussed. The relevance of the project is outlined and demonstrated. The communication is clear. The arguments to support the choice are available. Topic choice is well discussed and justified using a range of arguments. The relevance emerges logically from the construction of arguments in addition to being clearly articulated. Topic choice is well discussed and justified using a range of arguments. The topic is novel and makes some contributions to the existing literature. Relevance emerges logically from the construction of arguments in addition to being clearly articulated.
Literature review (20%)
The literature used is not academic and not appropriate. No critical review but opinions or mere listing of sources. The quality of the literature is questionable or not relevant. Presentation of literature instead of discussion/evaluation. Points are supported with relevant literature, but the scope of the literature review is limited. Visible structure in the discussion but not elaborated. The demonstration of the alignment of the existing project with the literature is required. A good range of literature is examined, and it is mostly relevant. Studies are contrasted and evidence of evaluation. Some demonstration of alignment of the existing project with the literature. Well-argued and logical literature review that highlights the different themes in the literature.
Critical reading and evaluation of the literature are clear throughout. The discussion of how the project fits with the existing literature is available. Well-argued and logical literature review that highlights the different themes in the literature.
Critical reading and evaluation of the literature are clear throughout. An excellent discussion of how the project fits in the existing literature. The coverage of the literature is outstanding.
Research questions and aims/
objectives (10%)
Aims, objectives or research questions/ hypotheses are missing or so poorly written that the meaning is unclear. They are not linked to the literature review. Aims and objectives are vaguely described. Hypotheses and research questions are outlined but not clear and unfocused. Hardly any link to the literature review. Aims and objectives are identified and are mostly relevant. Hypotheses or research questions are outlined but lack clarity. Some links to the literature. Aims and objectives are well selected. Hypotheses or research questions are relevant and clear. The link to the literature is evident. Aims and objectives are well selected and thought through. Hypotheses or research questions are relevant and well developed and follow logically from the literature review. Aims and objectives are well selected and thought through. Hypotheses or research questions are relevant and well developed and follow logically from the literature review. The hypotheses meet all standards of a good hypothesis.
Research plan/ methodology (20%)
Methodology is either not appropriate or poorly articulated, suggesting deficits in understanding. Basic outline and discussion of methodology, but details not always clear. Methodology is explained and appropriate. Methodology is well argued and justified. Creative and excellent choice of methodology including evaluation of other approaches. Creative and excellent choice of methodology including evaluation of other approaches. Demonstrates deep understanding of a range of methods and approaches. Clearly articulated and justified.
Results and Discussion (20%) Results are not properly arranged. The discussion is made haphazardly. The justifications for the results are not provided. The results do not clarify if the research questions are answered, or the objectives are achieved. A vague discussion of results is available, but the justifications for the results are not provided. The connections of results with research questions are blurred. Some of the claims are superficial. The results are well explained and connections with the research questions are understandable. Some references are also available, but justifications are missing. The results are very well written, and a detailed discussion of the results is available in line with research questions and previous studies. The justifications are also available. An excellent elaboration of results is provided and the connections with research questions/objectives are very clear. The justifications are provided where necessary from the previous studies. The contradictions and similarities are also highlighted. An excellent elaboration of results is provided and the connections with research questions/objectives are very clear. The results are in line with all the parameters of a good research project. The justifications are provided where necessary from the previous studies. The contradictions and similarities are also highlighted. The claims are made very carefully.
Referencing (10%) In-text and reference list do not use the same Author-date system or there are more than 8 errors. In-text and reference list use a single Author-date system with 6 or 7 errors. In-text and reference list use a single Author-date system with 4 or 5 errors. In-text and reference list use a single Author-date system with 3 or 4 errors. In-text and reference list use a single Author-date system with 1 or 2 errors. In-text and reference list consistently use a single Author-date system throughout. No errors are made, and presentation is flawless.
Presentation (10%)
Aspects of the report are missing or so poorly written due to numerous spelling, punctuation, or grammatical errors so meaning is unclear. Report has all components but is not logical in its construction or has a numerous inconsistent spelling, punctuation, or grammatical errors. Difficult to follow. Report is relatively easy to follow but some notable drawbacks on presentation but remains readable. Report is mostly logical in its construction with a few spelling, punctuation, or grammatical errors. Report is logical in its flow. There is hardly any error in presentation or grammar. Report is logical in its construction with no spelling, punctuation, or grammatical errors.
Very readable. Highly professional presentation and attention to detail.
Summary Feedback Comments:
Written comments
Note to markers: Please complete a written report summarising your assessment of the projects strengths and weaknesses, in explanation of your assessment on page 2.
Note to students: Markers have marked from a printed copy of your project and this copy is not returned to you so you do not have access to any comments that may have been made on your script. Therefore, please find below comments from the author of this report.
Strengths
The core concept of this article is reasonable but it does cover a wide range of issues, so may that it would not be practical to address them all in a piece of work this length.
The literature review covers a number of issues but rarely critiques them and mostly consists of summaries of the sources findings.
Areas for Development
The main issue with this piece of work was that the requirements were for a piece of empirical research to be completed, but instead a solely a literature review has been completed, this has resulted in the work not meeting a number of the marking requirements. This disappointing as the core concepts could have easily been tested through modelling the impact that different investment approaches would have on a portfolios performance using historical information.
The research aims are very broad and this has limited the value of the literature review, by trying to address so many topics, none have been explored to much depth. The piece would be stronger with a clearer focus on fewer specific sub topics. The are no hypotheses given, hence none are being tested in the report.
The document layout appears to have been based on the examples provided on blackboard, this in principle is fine but why was the marking grid from the previous year included?
A number of spelling and grammatical errors throughout. The different font used for the reference list is distracting.
The report has a limited reference list that has shaped the limitations in the final report, e.g. identifying that a lack of consideration of investor behaviour suggests the author has not explored the extensive literature on behavioural finance.
Numerous inconsistencies with the UWE Harvard system, inclusion of full names rather than initials.
UMADQG-30-3 Strategic Project in Accounting and Finance
Final Report
FINAL AGREED MARK
(as a result of discussion between first and second marker) 85
Student name Wan Izzmar Wan Zuhairi
Student number 21053281
Marker name Subject Field Marking criteria and grading
The following guidelines attempt to clarify the characteristics that markers should look for in order to give a particular grade. It is not a checklist, and a piece of work does not necessarily have to meet every criterion in order to obtain a particular classification. It should be remembered that there may be significant variation in the quality of work within a classification.
Markers should consider the criteria on the next page and consider the extent to which these have been met using the following grading:
80%+ Outstanding; all key points (and some others) met and leaves little scope for improvement.
70-79% Excellent; covers all key points clearly and thoughtfully and is generally accurate.
60-69% Very Good - Good; meets many of the key points some often well, although some points could be developed.
50-59% Average; meets many of the key points but rather sketchy at times and arguments/material require development.
40-49% A pass; meets sufficient of the key points to merit a pass, but material very thin or given limited consideration, at times muddled.
Below 40% Referred; addresses few (if any) of the key points, inadequate understanding and insufficient development of material and/or inclusion of largely irrelevant material.
The Marking Criteria Table
Project Objectives
Are the research objectives clearly stated?
Are they intellectually challenging?
Are they of practical relevance?
Overall 80+ 70+ 60+ 50+ 40+ Below 40
Literature review
Demonstrates familiarity with relevant literature?
Demonstrates breadthanddepthof literature review?
Overall 80+ 70+ 60+ 50+ 40+ Below 40
Methodolgy and Research Design
Account of research methodology given?
Research design appropriate to project objectives?
Strengths and weaknesses of research methods assessed? i.e.a disccussion of issues of validity, reliability and generalisablity.
Ethical issues considered and evidence of ethical approval granted?
Overall 80+ 70+ 60+ 50+ 40+ Below 40
Data collection & analysis
Quality and depth of data collection?
Quality and depth of analysis?
Overall 80+ 70+ 60+ 50+ 40+ Below 40
Findings and Discussion
Relevant academic knowledge integrated? Links established between empirical research and literature/theory?
Are project objectives addressed here?
Overall 80+ 70+ 60+ 50+ 40+ Below 40
Conclusions and Recommendations
Clear, persuasive summary of overall dissertation?
Do they addresss project objectives?
Is the practicality of implementing recommendations considered?
Recommendations drawn from findings?
Recommendations for further research provided?
Overall 80+ 70+ 60+ 50+ 40+ Below 40
Presentation and Internal Consistency
Ease of reading and use of English (grammar, spelling, punctuation)?
Does the dissertation fit together as a whole are the chapters related?
Clarity of layout? Appropriate structure and use of subheadings?
Sources completely and consistently atrributed following conventions of UWE Harvard?
Appropriate use of summaries, tables, diagrams etc?
Within word limit of 9000?
Continuity of argument?
Overall 80+ 70+ 60+ 50+ 40+ Below 40
Originality/initiative
Originality of thought? Innovative Methods choices? Interesting/unique topic of study?
Level of critical and self-critical awareness?
Overall 80+ 70+ 60+ 50+ 40+ Below 40
A comparative analysis on risk management strategy for short-term and long-term investment
Strategic project (accounting and finance)
UMADGQ-30-3
Word count: 7561
Student number: 21053281
Executive summary
This study aims to comparatively analyse the existing literatures on risk management strategies for short-term and long-term investment. For this purpose, literatures on various methods and studies on risk management strategies was collected for analysis. Only secondary data will be used in this research. This study was made to analyse the different types of management strategies and how they work in different time frames as well as providing recommendations on which risk management strategy is suitable for different kinds of investors. This research was also done to address the literature gaps that exists in this field of research for future researchers reference on what other areas are there to be researched on. The results are expressed in evaluation of each method and how they work as well as recommendations.
Strategic project
A comparative analysis of different risk management strategies for short and long-term investing
Introduction
Many individuals and organisations seek to grow their wealth over time by investing in financial markets. However, investing comes with a certain degree of risk, and investors must be aware of the different types of risks that exists and how to manage them well to reach their financial goals. It is important for investors to consider the different types of risk management strategies before implementing as one might not be suitable for all types of investment. When used well in the right scenario, risk management strategies are able to successfully mitigate financial risks. Depending on the type of investors, different methods of risk management strategies are used to achieve a higher success rate on the investment.
Generally, there are two types of investors which are the short-term and long-term investors. Short-term investors are those who are focused on generating quick profits, typically on a time horizon of less than a year. They may choose to use strategies such as stop-loss orders and hedging. On the other hand, long term investors seek profit from long term investment, typically on a time horizon of several years or more. They may choose to use strategies such as long-term buy and hold strategies and diversification. While the types of risk management strategies are different for these two types of investors, they still carry the same financial goal which is to mitigate risk. Therefore, comparing and contrasting the different types of risk management strategies is crucial for both long-term and short-term investing.
Risk management strategies are important in both short-term and long-term investment. Primarily, these strategies are ways for investors to protect as well as enhance their investments. Risk management strategies helps investors to protect their investments from significant losses that could occur due to unforeseen events or market volatility. Investors will be able to take calculated risks that have the potential to generate higher returns.
This research aims to provide a comparative analysis on the different types of risk management strategies for both short-term and long-term investing and will examine the advantages and limitations that comes with it. Various strategies such as diversification, stop-loss orders, diversification, hedging and many more will be analysed through secondary data. Through these analysis, the research findings will be valuable for investors looking to manage investment risk and achieve financial goals.
Furthermore, this research provides different contributions to the literature by addressing gaps in the research such as the lack of comparative analysis available. While there are substantial amount of literature on risk management strategies for both long-term and short-term investing, they do however lack in comprehensive comparative analysis that is able to show the effectiveness of each different strategies for different investment horizons. Most studies instead tend to focus on the effectiveness of individual risk management strategies. It will also fill in the gap as there has not been much study that suggests what risk management strategy is suited for investors of different kinds. Research on each strategy tend to be specific and does not explore the us of its strategy in different time horizons or investment style.
Other than that, an abundance of study on risk management strategy tend to focus on short-term investing strategies. This could happen due to the perception of risk where short-term investments are perceived as having a higher degree of risk which
1.1 Research objectives of this study
The objectives of this research is to provide a literature review and synthesis on risk management strategies for short term and long term investing as well as providing recommendations on risk management strategies for investors. This includes, identifying and critically reviewing existing literatures on risk management strategies, examining the effectiveness of different strategies, comparing and contrasting the benefits and limitation of various approaches, providing a comprehensive overview of key factors that should be considered when selecting strategies, identifying gaps in the literature, identifying gaps in the literature and proposing future research directions to address them. These objectives will help to provide a clear framework for organizing the literature review and ensure that it is focused, informative and comprehensive.
By achieving these research objectives, this study will contribute in to the existing literature on different types of risk management strategies in the context of short-term and long-term investment. This study aims to provide practical guidance for investors on how to management investment risk effectively. The review can help investors make more informed decisions about risk management strategies for short-term and long-term investment, while also identifying opportunities for future research to expand current understanding on these strategies.
Literature review
2.1 Short-term investing strategies
Short-term investment strategies are designed to generate quick profits by effectively taking advantage of short-term price fluctuations in financial markets. This type of investment are associated with high levels of risk and will require implementations of short-term risk management methods. Financial market volatility is the key risk for investments goals with a short-term time horizon. This literature review will analyse the effectiveness of commonly used short-term investment strategies as well as the strength and limitations of each approach.
First we have the commonly used stop-loss orders. This strategy involves setting a predetermined sell price for a security that is lower than its current market price. An order to the broker will then be made to exit the position when the price of the contract meets the predetermined sell price (Snorrason and Yusupov, 2005). Several studies have shown that stop-loss orders can be effective in mitigating downside risk and minimizing losses for short-term traders from holding investments too long through automatically prompting the sales of losing investment (Lei and Li, 2009). However, investors may also be susceptible to market volatility with this strategy where they might have missed opportunities for profit when prices rebound after a temporary decline. An investors risk tolerance is important when considering the usefulness of stop-loss orders (Frazzini and Pedersen, 2013). Stop-loss strategy are more efficient when the price of a security follows trends and have momentum which can potentially save the investor from experiencing large losses (Snorrason and Yusupov, 2005). There is also many records of underperformance by investors which is attributed to the fact that individuals tend to trade frequently, buying and selling stocks in response to short-term market fluctuations rather than holding on to them for the long term (Barber and Odean, 2000). This research is excellent in providing insights on the dangers of excessive trading and the importance of a disciplined, long term approach to investing in the stock market. The relationship between trading activity and expected stock returns was also examined where higher trading volume may simply reflect higher risk (Subrahmanyam and Anshuman, 2010).
Other than that, there is the options trading which is another popular trading strategy for short-term investors. Option contracts provides the right to buy or sell a security at a predetermined price within a specified time frame. Through speculation, investors are able to hedge against downside risk or to generate profits. This strategy is effective for short term-traders for managing risk in both bullish and bearish markets. However, there are several approaches to option trading and can be complex for investors to use. A financial engineering research paper by Duraipandian (2014) has shown that there are several types of option trading strategies available for investors such as arbitrage, option spreads and butterfly spread. This shows that a deep understanding of financial derivatives and market condition is needed through careful speculation in order for this strategy to be effective. Options trading is complex because it involves multiple variables, different types of options, nonlinear payoff structure, and sophisticated pricing models. However, it can be a good choice for investors who are looking for leverage, flexibility and opportunities in volatile markets.
Then, there is the hedging strategy where it is performed by taking positions in two or more securities that have a negative correlation with each other. This is done to reduce overall portfolio risk by offsetting losses in one security with gains in another. Through hedging, an investor will long (buy) a financial instrument they believe will have an increase in price and short (sell) an instrument that will decrease in price. However, hedging strategies can be costly and may result in missed opportunities for profits when market is trending upwards. Hedge funds are also unregulated pools of money managed by an investment manager and only takes capital from wealthy investors who meets specific requirements (Pluck, 2007). This is typically because, the investments that are being made are expensive and complicated. The hedging strategy effectiveness is also varies over time in response to market conditions (Choudhry, 2000). Factors such as financial crisis had also made an impact to the effectiveness of hedging (Gupta and Kaur, 2008). Factors such as market risk needs to be considered as hedging instruments are susceptible to this risk. This means that their value can fluctuate depending on market conditions. If the hedging does not perform as expected, it can result in losses for the investor.
2.2 long term investing strategies
Long term investing strategies aim to generate sustainable returns on long-term time horizons, typically over a period of several years or decades. This strategy has been popular among investors who are seeking to achieve their financial goals without incurring excessive risks. However, there is still much debate amongst scholars and investors on the most effective long-term investing strategies. The purpose of this part of the literature review is to provide a comprehensive overview of the existing literature on long-term investing strategy. This will also include examples as well as the strength and limitations of each strategy.
The buy and hold strategy is a method of a patient, long-term investment approach. The strategy is often used by index funds and exchange-traded funds (ETFs), with the goal of replicating performance of a broad market index by buying and holding a diversified portfolio of stocks. It is considered to be a conservative approach in which investors buy and hold stocks over a long period of time regardless of fluctuations in the market. The key advantage of the buy and hold strategy is that it allows investors to avoid the costs and risks associated with frequent trading. This strategy signifies that investors who are holding on their investment for a long period of time will possibly earn higher returns (Ling, Yat and Muhamad, 2014). By holding on to a well-diversified portfolio of assets for the long term, investors are able to benefit from the compound effect of reinvesting dividends and interest payments, and can avoid transaction costs such as brokerage fee and taxes. One of the main theoretical foundations of this method of investment is the efficient market hypothesis (EMH) which suggests that there is no point to sell when the market is efficient and the price is right at any given time (Zhou, Xu and Shiryaev, 2008). However, this method of investment requires patience and discipline, as investors must be willing to hold onto assets through long periods of market volatility and uncertainty. However, the buy and hold strategy may not adequately protect investors from market downturns and can result in significant losses during bear markets. This strategy assumes that the market will eventually recover from any declines and continue to rise in the long run. While this may be true in some cases, there is no guarantee that the markets will recover within specific time frame, or that the recovery will be strong enough to offset and losses incurred during the bear market. While this research focuses on the diversification method, it provides good insight on the limitations on buy and hold strategy which was used to compare to the diversification strategy.
Another method of long-term investment is diversification. Through diversification, investments can be spread across multiple asset classes, sectors, and regions in order to reduce risk and enhance returns. This is done by investing in a wide range of different securities, where investors are able to reduce the impact of individual security or sector-specific risks and benefit from the long-term growth potential of multiple markets. Empirical evidence by Brinson, Hood and Beebower (1986) suggests that diversification is an effective long-term investment strategy. In the study, it is found that asset allocation through diversification account for approximately 90% of the variability of investment returns, while security selection and market timing account for only 10%. Similarly, a research by (Lekovic, 2018) found that investing in 100 different securities is ten times less risky then investing in 10 securities through simple diversification of investments, based on the law of large numbers. However, diversification does not come without its limitations. For example, this method may not be effective in extreme market conditions such as during a financial or economic crisis where all asset classes may experience a significant loss in price. Another research paper that will be used for analysis on diversification will be by Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower (1991) which provides excellent view on diversification on performance investment. Albeit an old research, the paper had a significant impact on the investment industry, as it highlighted the importance of asset allocation in achieving superior investment performance. Another research paper that have highlighted the benefits and potential high returns of diversification by (Gorton and Rouwenhorst, 2006). However this research was done only on commodity futures from 1959 to 2004. To further explore the benefits of diversification on other types of investment, a research paper on investment option offered by 401(k) plans by (Elton, Gruber and Blake, 2006) was chosen. While not being a typical security like stocks or bonds, a research on diversification for 401(k) plan which is type of retirement savings plan offered by employers in US will be able to solidify the importance on diversification in investments.
Asset allocation is another widely accepted investment strategy that involves diversifying an investment portfolio across different asset classes such as stocks, bonds or even real estate. Similarly to diversifying, this method has a goal of reducing risk by investing in a variety of assets that have low correlations with each other. The research study done by Petre (2015) defined asset allocation as the process of implementing time varying expected excess return and expected risk, with a long-term time horizon, with the objective to improve the risk and return profile of the overall investment portfolio. Implementing this strategy will give investors the benefit of reducing overall portfolio risk after a period when return of assets are considered to be risky which can be very appealing for long-term investors. Having the right balance between risks, profit and combination of different assets are important. Research study done by (Zolkin, Shevenko, Poskryakow and Zavialova, 2021) stated that there are three basic principles of asset allocation to portfolio which are conservative, diversification and optimal marketability. The same study has also shown that there are multiple methods of approaching asset allocation such as the Sharpe model which is done for risk calculation that assumes the correlation between potential profit from assets and from the market itself. There is no method that triumphs above the rest in asset allocation. Therefore, an optimal asset allocation will depend on the investors individual circumstances and financial goals. Implementing an asset allocation strategy can be challenging due to the complexity of selecting and managing a diverse set of assets which can lead to higher transaction costs and lower returns (Maginn, 1997).
2.3 Literature themes and gaps in the research
Throughout the literature review, a few themes have been identified with the risk management strategies. The themes are diversification is an effective risk management strategy for both short-term and long-term investing, stop-loss orders can be an effective risk management strategy for short term investing, but may not be as useful for long-term investing, hedging is commonly used as risk management strategy for short-term investing, but may not be as effective for long term investing, options trading can be an effective risk management strategy for both short and long term investing, but require expertise and may involve higher costs and risks and Diversification is a method of asset allocation. The themes found within the literature review will later be synthesized as a form of comprehensive and comparative analysis for this research paper.
Study design
3.1 Research method
A quantitative research study on different risk management strategies for short-term and long-term investment were conducted by primarily using secondary data. The research question What is the effectiveness of different risk management strategies for short-term and long-term investing? and can different risk management strategy be used for time horizons that are uncommon to its method and Are these risk management strategies suitable for all types of investors?was formed. This research will be a literature review paper hence, there will be no collecting or analysing new data, but rather reviewing and synthesizing existing data. The type of data will be only secondary data, which are data that has already been collected and analysed by other researchers, organisations or institutions.
Relevant databases was identified through the first step of this research which was in conducting a literature review. Databases that contains articles and studies related to this research topic were used such as Google scholar and UWE library primarily. For ease of finding literature, a set of search terms were developed to query the databases. The search terms were specifically tailored to the research topic and included keywords such as risk management strategies, short-term investing strategies, and long-term investing strategies. After conducting the literature search, the articles were screened to identify only those that are relevant to the research topic. This step of the research primarily involves reviewing titles, abstracts and keywords of the articles which is done to determine whether they are relevant to the research. With enough relevant literatures, the findings for each articles were synthesized to provide a comprehensive overview of the current knowledge that is available on risk management strategies. The synthesized findings were later used to draw conclusions, potential limitations and to identify gaps in the literature, as well as provide recommendations for future search. This methodology was done to ensure that the research will be clear, concise, and transparent, providing a comprehensive and systematic approach to identifying, selecting and analysing the literatures on risk management strategies of short term and long term investment.
3.2 Ethical considerations
It is essential to recognise that the literature used can be biased, as it may only include studies with significant result or studies conducted in certain geographic locations. There needs to be awareness on this matter and address them by seeking out and include all relevant literature, regardless of the study. Such biases may come in different form which includes, publication bias. This can occur when published studies are biased towards significant positive results. Researchers may be more likely to publish studies with significant results, leading to a potential overestimation of the effect size. This bias can be particularly prevalent in fields such as finance where studies with negative or insignificant result are less likely to be published. Then there is the geographic bias when the literature review is biased towards certain studies conducted in certain geographic locations. For example, a literature review on the risk management strategies use in financial markets such as S&P500 might not reflect other markets.
There is also the time-horizon bias which refers to the tendency of researchers to focus only on studies that cover the same or similar time horizon in their research. This bias can occur when researchers are primarily interested in either short-term or long-term strategies and does not explore both time horizons when conducting their research. This bias can limit the comprehensiveness of the literature and potentially lead to inaccurate conclusions.
Unbiased literature reviews are essential because they provide a comprehensive and accurate overview of the available evidence on a specific research question. When conducting this research it is important to have a complete understanding of the current state of knowledge in the field to ensure that the research is based on the best available evidence. If a literature review is biased, it may result in an incomplete or inaccurate conclusions, leading to incorrect decisions or recommendation based on flawed evidence. Biases in the literature review can lead to the exclusion of valuable research, favouring one perspective over others, or interpreting the data in a way that supports preconceived beliefs or hypothesis.
4 Discussion and research findings
4.1 Synthesized findings with comparative analysis
In reviewing the existing literature on risk management strategies for short-term and long-term investing, a few themes have merged across the studies.
4.1.1Diversification is an effective risk management strategy for both short-term and long-term investing.
First of all, many studies found that diversification is an effective risk management for both short-term and long-term investment. This is because diversification is able to mitigate the impact of market volatility on individual assets which helps to reduce overall portfolio risk. Research have consistently shown that diversification is a key component of successful investing, and can be an effective risk management strategy for both short and long-term investment goals. For short-term investors
Research paper that supports this claim includes determinants of portfolio performance II: An update by Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower (1991). In this paper, the author analysed the performance of large institutional investors over a decade period and found that most of the variation in the portfolio returns are attributed to asset allocation decisions, with diversification being a key factor in achieving consistent returns. The researchers concluded that diversification was important for both long-term and short-term investors.
Another research paper that supports this claim can be seen in the study facts and fantasies about commodity futures by Gary Gorton and K. Geert Rouwenhorst (2006). The authors conducted a study on the benefits of commodity futures for investors with different time horizons. They have found that well diversified portfolio of commodity features are able to provide benefits for both short-term and long term investors. Their study showed that commodity futures returns were not highly correlated with returns on traditional financial assets such as stocks and bonds, indicating that adding commodity futures to a portfolio is able to improve its risk-return characteristics. Additionally, the study found that the benefits of diversification were similar to both short-term and long-term investors. One reason for the effectiveness of diversification in the commodity futures market is that different commodities tend to have low correlations with one another. Thus, holding a diversified portfolio of commodities can reduce the volatility of returns. This concept can also be applied to other asset classes, as diversification can reduce the risk of any one investment dragging down the performance of an entire portfolio.
Other than that, the research paper The adequacy of Investment Choices by Offered by 401k plans by Edwin J. Elton, Martin J. Gruber and Christopher R. Blake (2006) suggests that offering a diversified set of investments options in 401(k) plans lead to better outcomes for investors in the long run . The authors find that plans that offer more investment options tend to have higher average returns and lower risk than plans with fewer option. Furthermore, they find that investors will choose to take more diversified portfolios when given the opportunity to do so. While this study is specific to the context of 401(k) plans, it provides evidence that diversification is an effective strategy for long-term investing. By offering a range of investment options, investors are more likely to achieve better outcomes through a diversified portfolio. This concept can also be applied to short-term investing as diversification can help mitigate risk and improve returns in any investment horizon. This research paper was chosen specifically to explore investment outside common securities such as stocks and was able to prove that diversification works in the same way as other securities.
Overall, this theme is well supported by research, and should be considered by investors looking to build a well balanced and diversified portfolio.
4.1.2 Stop-loss orders can be an effective risk management strategy for short term investing, but may not be as useful for long-term investing
This theme based on the idea that stop-loss orders can help limit losses in volatile markets, but can also lead to missed opportunities for future gains in the long-run. This theme was found a few research paper such as Trading is hazardous to your wealth: The common stock investment performance of individual investors by Brad M. Barber and Terrance Odean (2000). The researches have analysed the trading behaviour of individual investors and found that they tend to sell winning stocks too soon and hold on to winning stocks for too long. The stop-loss strategy was proposed which could potentially help individual investors limit their losses and improve their overall trading performance. Throughout this research, the authors conducted a series of simulation to test the effectiveness of stop-loss orders for individual investors. They have found that the use of this strategy led to lower volatility in returns and better overall performance, particularly for investors who held stocks for shorter periods of time. However it is noted that the use of stop-loss orders could result in missed opportunities for gains, particularly for long-term investors who may be more willing to tolerate short-term losses.
Other than that, there is the research paper Trading activity and expected stock returns by Tarun Chordia, Avanidhar Subrahmanyam and V. Ravi Anshuman (2010) which examined the relationship between trading activity and expected stock returns, specifically investigating whether high trading volume is associated with lower expected returns. Throughout this research, the authors uses examples of NYSE, AMEX, and NASDAQ stocks from 1963 to 2005 and has found that stocks with high trading volume have lower expected returns compared with those with lower trading volume. The authors argues that this effect is particularly pronounced for individual investors who tend to engage in more short-term trading. The results suggested that stop-loss orders may not be as useful in long-term trading as they may lead to increased trading activity and lower expected returns.
Another research that is in-line with this theme is Betting against beta by Andrea Frazzini and Lasse Heje Pedersen (2013). The authors examined the relationship between the beta of an asset and its risk-adjusted returns. The authors have found that high beta stocks have lower risk adjusted returns compared to low beta stocks, which is contrary to the traditional asset pricing theory that higher beta leads to higher returns. It is argues in the research that this anomaly arises because investors are willing to pay a premium for assets that provide insurance against market downturns, which leads to a mispricing of high beta assets. In terms of the theme, the findings suggested such orders may be less effective for long-term investing since high beta assets are more likely to experience significant fluctuations in price over shorter time periods. Therefore, the stop-loss order strategy may results in investors selling out positions too early which causes them to miss out on potential long term gains. However for short-term investing, stop-loss orders may be a useful tool to manage risk where the focus is on minimising losses and avoiding large drawdowns.
4.1.3 Hedging is commonly used as risk management strategy for short-term investing, but may not be as effective for long term investing.
In the short-term, hedging is able to help investors limit their exposure to market volatility and reduce the impact of unpredictable events. For example, a trader might use hedging strategy against a sudden market downturn or to protect against the risk of a specific event. However, in the long-term hedging may not be as effective as it can reduce the potential upside of an investment. The cost of hedging might eat into potential profits and may limit an investors exposure to certain market classes that perform well in the long run. The research paper Time-varying distribution and hedging effectiveness of three specific basin stock futures by Taufiq Choudhry (2000) is in line with this theme where the researcher examines the effectiveness of hedging strategies in Hong Kong, Japan and Singapore. The researcher used a time-varying distribution approach to estimate the optimal hedge ratio and examines hedging effectiveness in different time periods. The research suggested that the while hedging can be an effective tool for the short-term investment, its effectiveness diminishes in long-term investment due to changes in correlation between stock and future returns. Specifically, the paper showed that hedging effectiveness is highest in the short term but decreases over time especially during periods of market volatility.
Similarly, in the research paper Impact of financial crisis on heding effectiveness of future contracts: evidence from the national stock exchange of India by Kapil Gupta and Mandeep Kaur (2015), the authors studies the effectiveness of futures contracts as a hedging strategy during a financial crisis, which can be considered a short-term event, and found that the effectiveness of futures contracts as a hedging strategy during a financial crisis. This can be considered as a short-term event and found that the effectiveness of futures contracts as hedging strategy varied across different industries and time periods. This suggests that hedging might be more effective in short-term during specific market conditions, but may not be a reliable long-term strategy for risk management.
4.1.4 Options trading can be an effective risk management strategy for both short and long term investing, but require expertise and may involve higher costs and risks.
Options trading is a type of financial derivatives trading that provides investors with the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and time. This type of trading has become increasingly popular among investors looking to hedge their positions, speculate on the market movements, or generate income. One of the key advantages of option trading is that it allows investors to manage risk in a more precise manner. This is because options can be used to hedge against the market volatility and limit potential losses, while still allowing for upside potential. For short term investors, options can be particularly useful in managing risk associated with specific events such as earnings report or other major announcements. However with the literatures that have been review on options trading, authors have consistently stated that options trading is requires a high level of expertise, as well as a thorough understanding of market dynamics and the various strategy involved. Additionally, options trading can be more costly and involve higher risks compared to other investment strategies, particularly if not executed properly. Despite the risks, it seems many investors still see options trading a viable strategy for both short and long term investing. The research paper analysis of option trading strategies as an effective financial engineering tool by Shalini and Duraipandian (2014) explored this theme well. The research paper examined on the different strategies for managing risks in options and has listed a few that is available to investors. The strategies that were mentioned includes, arbitrage, hedging, speculation, option spreads, butterfly spreads, calendar or time spread, straddles, and strips. This shows that there is no one way of doing options trading as can in fact be confusing to new investors who are looking to seeking financial gains. However, in the research paper options trading strategy based on Arima forecasting by Rostan, Rostan and Nurunnabi (2020), the authors explored on the profitability of options trading based on auto regressive integrated moving average (ARIMA) forecasting of the S&P500 index instead. This adds up on to the existing number of ways on how options trading is done which further justifies the complexity of this method of risk management. However, the paper shows that it is still indeed a good strategy for short-term and long-term investing as the research shows that there has been a substantial net profit when applied to a 60-month historical database of options contract.
4.1.5 Diversification is a method of asset allocation
The literatures that have been reviewed on diversification and asset allocation shows that there are similatrities between the method of diversification and asset allocation. For example the study of Determinant of portfolio performance by Brinson, Hood and Beebower (1986) has shown that asset allocation was the primary driver of portfolio performance which accounted 90% of the variation in returns amongst institutional portfolios. Subsequent research including Does asset allocation policy explain 40,90,100 percent of performance? by Ibbotson and Kaplan (2001), has reinforced the importance of asset allocation in achieving long-term investment success. Additionally, a number of studies have specifically examined the role of diversification within asset allocation, with findings that diversification can reduce risk without necessarily sacrificing return. Research paper such as The adequacy of Investment Choices by Offered by 401k plans by Edwin J. Elton, Martin J. Gruber and Christopher R. Blake (2006) found that diversified portfolio of U.S equities outperformed individual stocks and narrow portfolios. Overall the evidence suggests that diversification is a key element of successful asset allocation, and that investors who effectively diversify their portfolios can potentially achieve better risk-adjusted return in the long run.
4.2 Gaps in the literature and recommendations for future researchers
4.2.1 Lack of consideration of investor behaviour
Throughout this research, there has been a lack of consideration of investor behaviour. Investor behaviour refers to the emotional and psychological factors that influences investment decision, such as fear, greed and overconfidence. While all the risk management strategies discussed in the literature have been found to impact on investors return it is also important to consider investor behaviour in their findings. For example, investors may be more likely to panic and sell during market downturns, even if they have a long-term time horizons. Quantitative approach such as the one used in the research An empirical Re-investigation on the Buy-and-hold strategy in Four Asian markets: A 20 year study by Ling, Ching Yat and Muhamad is commonly used and is typically plausible with their findings. However more researches like this should account for and mitigate investment behaviour. For example, this can be done by providing education and training to investors on the benefit of a long-term investment horizon and the risks of emotional decision-making which could help reduce the impact of investor behaviour on investment outcomes.
4.2.2 Limited empirical evidence
There is a limited empirical evidence on the existing literature of risk management strategies for short term and long term investments. Empirical evidence is important in this research because it provides objective and verifiable data that can be used to evaluate the effectiveness of different risk management strategies for short-term and long-term investments. By gathering empirical evidence, researchers can identify the strengths and weaknesses of different strategies, and use this information to develop more effective approaches to risk management. This would also enhance the credibility of research findings by providing objective data that can be independently verified. Other than that, empirical evidence helps researchers to test hypotheses about the effectiveness of different risk management strategies. This could potentially help researchers to refine existing strategies or develop even more approaches that are better suited to the needs of investors.
4.2.3 lack of comparative analysis
Comparative analysis is also another gap in the literature on risk management strategies for short term and long term investments. Comparative analysis involves comparing different risk management strategies to identify their relative strength and weaknesses. By conducting comparative analysis researchers are able to gain better understanding of how different strategies perform under different market conditions, for different types of assets, and for investors with different risk tolerance level. This will help investors to make informed decisions and improve outcomes. The lack of comparative analysis in the existing literature is due to the difficulty in comparing effectiveness of different strategies, given the complexity and variability of investment markets. However it is an important area of research, as it can help to identify the most effective strategies for investors.
5. Recommendation for investors
In conclusion, the importance of risk management strategies in investing ha become increasingly apparent. Especially with new investors who are looking to seek profit or in the wake of financial crisis, risk management strategies can be used to mitigate risks and improve profitability. With the various strategy listed in this research paper, each strategy have their own strength and weaknesses and should be used in a way that is suitable for the investor. The general idea of which strategy that investors can use are as follows.
Options trading is particularly useful in volatile markets. This is due to the fact that options give the holder the right but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time frame which can be used to hedge against potential losses, or to generate income by selling options to investors. With the many approaches that can be taken to perform options trading, it recommended for investors who are more experienced and have a good understanding of the options market and are comfortable at taking high levels of risk. For investors who are risk-adverse, option trading might not be suitable as it involves a higher degree of risk than traditional investment strategies. However, it can still be used as a risk management tool to limit their downside risk while still being able to participate in potential upside gains but they should carefully evaluate their investment objectives and consult with financial advisor before engaging in options trading. Hence, options trading is the most useful tool for investors with the right experience, knowledge and risk tolerance.
Then, the buy and hold strategy is excellent for long-term investing since the method involves investors to buy securities and hold them for an extended period, typically five to ten years or more. This strategy is recommended for investors who have long-term investment horizon and are seeking to build wealth over time. This is because, the strategy can help investors avoid the costs associated with frequent trading, such as transaction fees and taxes. By holding investment for the long-term, investors can reduce the impact of these costs in their overall returns. They are also able to avoid the pitfalls of market timing. Attempting to time the market by buying and selling based on short-term fluctuations can challenging, even for experienced investors. By holding investment for the long-term, investors can avoid the stress and uncertainty of trying to predict short-term market movements. Since this strategy is done over a long time-horizon, it is generally more suitable for risk-tolerant investors who are comfortable with the potential for short-term market fluctuations. While this strategy can provide significant long term returns, there can be periods of market volatility that may tempt some investors. Overall, the buy and hold strategy is not suitable for investors who need access to their funds in the short-term or who are uncomfortable with the potential of market fluctuations.
Other than that, the stop loss orders strategy is useful for risk adverse investors who prioritize capital preservation over potential returns. It is useful for capital preservation because, this strategy limits potential losses which can help investors protect their investment portfolios from significant declines in value. This provides risk adverse investors a form of security and help them with risk exposure. The strategy is also useful for day traders who are actively, trading securities and looking to limit their potential losses on individual trades. Day traders are recommended to use stop loss orders as a risk management tool to protect them against sudden price movements or unexpected events that could result in significant losses. This is due to the style of day traders who trades in more volatile securities such as stock, futures, cryptocurrencies and options. However, they should be aware of the potential drawbacks of using stop loss orders and use them judiciously as part of a broader risk management strategy. In short summary, the stop-loss orders is recommended to use by both risk adverse and risk tolerant investors depending on their individual circumstances and investment goals.
After that, the diversification method is suitable for all types of investors whether they are conservative, moderate or aggressive in their investment approach. For conservative investors who prioritize capital preservation, diversification can help to spread their investment risk to across a variety of assets, thereby reducing their exposure to any one particular asset. This approach helps them to protect their capital while earning a modest return on their investment. For aggressive investors, diversification can help balance their portfolio by investing in both equity and fixed income assets. This helps to minimize risk while generating a steady income. For aggressive investors, diversification can help to balance their portfolio by investing in a mix of high-risk, high return assets and lower-risk, lower-return assets. This method is can help them to potentially generate higher returns while still managing their risk exposure. Overall, it is a flexible investment strategy that can be adapted to meet the needs of investors with varying risk tolerance, investment goals and time horizons.
Similar to diversification method, asset allocation is also suitable for all types of investors. It is related but have distinct concepts in investment management. While diversification is a practice of spreading investments across different asset classes, industries and geographies to reduce overall risk in an investors portfolio, asset allocation on the other hand, involves selecting a mix of different class assets that align with investors investment goals and tolerance. The goal of asset allocation is to optimise the risk and return characteristics of investors portfolio over the long term. In other words, diversification is one way to implement asset allocation. By diversifying your portfolio, investors are effective allocating investment across different asset classes. However, asset allocation is a more comprehensive strategy that take into account a broader set of factors, such as investment objectives and time horizon.
Lastly, hedging is suitable for investors who have a low tolerance for risk, but still want to maintain their exposure to certain assets or markets . It can also be suited for investors who have a concentrated position in a single security or asset and want to reduce their exposure to potential loss. However it is considered to be a more advanced investment strategy, and is suitable for experience investors who have a good understanding of the securities or assets being hedged, as well as the mechanics of the hedging instrument being used. Beginner investor may find hedging to be too complex and may not fully understand the risks and potential costs involved. Hedging also involves additional transactional costs and complexity, which should be carefully considered before implementing a hedging strategy.
5. Conclusion
Risk management strategies comes in many methods that can be effective in reducing risk in a portfolio. However each of these strategies has its own limitations and may not be appropriate for all investors. However when used correctly, choosing the right risk management strategy can benefit short-term investment as well as long-term investments. Overall, investors should carefully consider their investment goals and risk tolerance when selecting a risk management strategy. Certain risk management strategies are more suitable to certain type risk tolerant investor. Investors need to also explore on the uses of risk management strategy in different time horizons. They should not be limited to the preconception of risk management strategies being effective in only a short-term horizon or long-term horizon.
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