Question

1. Provide two reasons for why it is important to study the relationship between the stock price
and macroeconomic (or financial) variable. Support with four existing literature.

2. Update the latest theory on modern portfolio theory and describe any issues related such trade ward, Hong kong issues etc and any new discovery about that portfolio theory.

Answer 1

Solution 1

Stock price is ladgely reflection of Macroeconomic indicators as well as global phenomenon and shareholders are cognizant of this fact. For example, stock like Aamzon which is into B2C business will see large dip if the GDP numbers are low, if the inflation is too high or if the unemployment is too high or say if the US dollar is appreciating largely.

References :

1. Impact on macroeconomic variable on stockprices, by Muhammad Nauman Khan, Springer
2. Relationships between macroeconomic factors and stock prices in Nigerian stock market, by Rufus Olowe, Jstor
3. Macroeconomic indicators and their impact on stocks market in Asian 3,by Amit Vikram Megaravalli, 02nd October 2017,
4. Impact of Macroeconomic variable and stockprices in Pakistan, by Hunjra and Ahmed Imran, University library of Munich, Germany.

Solution 2

Modern portfolio theory highly used by mutual fund houses as framework for mean variance analysis which helps fund manager integrate portfolio of assets to maximise returns with particular level of risk.

These theories however pose challenges and issues like risk is directly proportional to return which is not always proven statistically. Secondly many economists have recently found flaw in model which states that there is no relation between risk and volatility which is completely untrue.