1.0 Introduction (50 words)
2.0 Analysis portfolio choices from Anchoring bias
Anchoring bias involves both overreaction and under-reaction by investors. Overreaction is based on the emergence of negative information that affects the stock price, which will lead to panic and lead to selling, which will depress the stock price too much. If the stock price falls too far below the intrinsic value of the stock, the rational investment decision should be to buy rather than sell. Similarly, the emergence of positive information affecting the share price causes the share price to rise to overdraft the company’s future performance (if the rise in the share price is based on the company’s performance in the next 5-10 years will continue to be so outstanding, it involves uncertainty). This is the time to consider should be cautious or sell. From the second half of 2021, Vodafone in the UK will host all of virgin mobile’s services, including 5G, replacing BT’s current agreement. BT’s shares took a hit after its mobile partner Virgin Media struck a five-year deal with rival Vodafone. From the second half of 2021, Vodafone’s network in the UK will host virgin mobile services, including 5G, replacing BT’s current agreement. Vodafone shares closed up nearly 0.3% after earlier rising 1.5 percent. Based on the above information, the stock of Vodafone has achieved a rise. However, as 5G is the core business of Vodafone, the stock may realize a loss due to technical sanctions. Therefore, this paper may overreact in choosing the investment share of Vodafone.
Under-reaction tells us the exact opposite. That is to say, the company has clearly turned a corner, the fundamentals are gradually improving, but the market response is often unable to keep up. This is often the case with unpopular stocks or stocks with a history of poor performance. In some cases, the fundamentals of a company have gone downhill, old businesses have been caught between left and right, new businesses have been delayed, management has become lax, and major shareholders have begun to sell. Tesco announced in February that it was selling its 20% stake to partner China resources for £275m, or about $2.5 billion. In a statement, Tesco PLC said the sale of the stake in the joint venture, which will be completed by the end of this month, was to further streamline the business and focus on the core. Tesco PLC has been streamlining its operations for the past five years. On the basis of the above news, Tesco’s business contraction occurred in February. However, in terms of the portfolio selection in this paper, the share of this stock with 12.62% underreacted.
Different events also tend to have different effects on the market. Generally speaking, price increases caused by merger events tend to be the most rational, because there is only a small chance that the transaction will eventually fail. So as soon as the news came out, the price jumped a little below the purchase price. There is less behavioral bias, which means the market is smart.
3.0 Portfolio asset allocation by applying portfolio theory (300 words)
3.1 The diversification of the initial 10-asset portfolio
3.2 Discussion perform over investment period
3.3 Discuss the correlations between 10 portfolio assets
4.0 Comparing Portfolio A and Portfolio B (300 words)
4.1 Discussion regarding Markowitz diversification
4.2 Discussion of the portfolio betas
4.3 Discussion of Sharpe ratios
5.0 Review 10-asset portfolio (300 words)
5.1 Discussion of retirement goal
5.2 Active and passive management
6.0 Conclusion (50 words)