Contents

I.

Executive Summary ................................................................................................................. 2

II.

Introduction ............................................................................................................................. 2

III.

Trading ................................................................................................................................. 2

1.

Overview of the Portfolio .................................................................................................... 2

a.

The return of the portfolio ............................................................................................... 2

b.

Portfolio breakdown ........................................................................................................ 2

2.

Trading strategy ................................................................................................................... 2

a.

Fundamental Analysis ...................................................................................................... 3

b.

Technical Analysis............................................................................................................. 3

IV.

Risk Profile............................................................................................................................ 4

V.

Overall evaluation.................................................................................................................... 4
1.

Portfolio Performance ......................................................................................................... 4

a.

Comparison of portfolio expected returns and actual return in weekly basic. ............... 4

b.

Calculate risk-adjust-return: ............................................................................................ 5

2.

Risk evaluation- risk control plan ......................................................................................... 5

a.

Predict the possible risk ................................................................................................... 5

b.

Strategies to hedging the potential loss/ risk exposure .................................................. 6

VI.

Reflection ............................................................................................................................. 7

VII.

Conclusion ............................................................................................................................ 7

VIII.

Appendices........................................................................................................................... 8

1.

Appendix 1: Trading Strategy............................................................................................... 8

a.

Appendix 1a: Fundamental Analysis ................................................................................ 8

b.

Appendix 1b: Technical Analysis .................................................................................... 10

2.

Appendix 2: Risk Profiles .................................................................................................... 11

3.

Appendix 3: Hedging Risks ................................................................................................. 13

a.

Appendix 3a: Options Tables.......................................................................................... 13

b.

Appendix 3b: Futures ..................................................................................................... 14

4.

Appendix 4: Trading diary .................................................................................................. 14

5.

Appendix 5: Portfolio: Beta and Return in weekly basis ................................................... 17

6.

Appendix 6: Sharpe Ratio................................................................................................... 18

7.

Appendix 7: Reflection ....................................................................................................... 19

IX.

Reference List..................................................................................................................... 20

I. Executive Summary
This report provides an analysis and evaluation of the investment process by our attitudes
towards return and risk in Market Watch. Methods of analysis include fundamental and
technical analysis as well as ratios such as Treynor ratio and Sharpe ratio. As result of data
analysed show that NDLS is in good financial status and has upward trend; NFLX is doing well
with different financial strategies; HES and SSI are doing well as stock price keep increasing.
All calculations can be found in the appendices. Unfortunately, some unexpected changes in
price and investors would face some risk. Long Put Option Contract and Short Sell Future
Contract are used to hedge unexpected risk.
II. Introduction
Absolutely, while trading in stock market, there are a number of types of risk that investors
have to suffer such as financial risk, legal risk, information risk, and market risk. Those may
affect investors attitudes towards research, trading and action of hedge to protect their
position. This paper will illustrate a process of analysing a trading transaction and portfolio
managing on the behaviour of a moderate risk adverse investor. Additionally, some hedging
methods option and future, also examine for the purpose of protecting our position against
various risks of market downturn on specific stock as well as a portfolio.
III.

Trading
1. Overview of the Portfolio
Latest record of the portfolio on 30/08/2014
a. The return of the portfolio
In overall, the return of our portfolio was constant for
the first and the second week due to the low trading
activities. However, in the third week of trading, the
return of the portfolio increased significantly by over
5.5%. Additionally, the current value of the portfolio is
$105,312.39 in comparison with the initial $50,000
cash. This result comes out due to the increasing of the
markets and the appropriate stocks allocation within
the portfolio. With higher market value of portfolio, it
implies that the investment is going on the right track
and right trading strategy.
In short, the increase in return of our portfolio helped
us improved the ranking position from 49th to 11th. We
also close all the investment activities on 26 August
2014.
b. Portfolio breakdown

2. Trading strategy
In this report, our team planned to use both fundamental and technical analysis in trading
Figure 1: Adapted from MarketWatch
strategy in order to facilitate our trading and have a better investment decision.

a. Fundamental Analysis
Applying fundamental analysis, the data from companies financial statements is collected from
Yahoo Finance to calculate the ratios to identify the intrinsic value of the stock. Moreover, the
fundamental analysis provides the outlook of the stocks and consolidates the investment
decisions. Below is the shortcut of highlight transactions which will be fully presented in the
Appendix 1a.
Highlight Transactions
Stock quote: NDLS
Period Ending
31-Dec-13 1-Jan-13 3-Jan-12
Current Ratio
0.76
0.68
0.63
Cash Ratio
0.04
0.024
0.025
Asset Turnover
1.87
1.91
2.03
Debt Ratio
0.34
0.91
0.94
Debt/Equity Ratio
0.51
13.74
24
Gross Profit Margin
0.22
0.22
0.22
Net Profit Margin
0.02
0.017
0.015
Figure 2.1: Adapted from Yahoo Finance (Shortcut from full data)
With the decreasing in current and cash ratio as well as the increase in asset turnover ratio, it
implies that NDLS is using its money effectively in order to generate the profits for the company
by its operations. On the other hand, the Debt/Equity ratio is going up while the Gross Profit
Margin is still constant, it is the signal of a long-term investment of NDLS. As a result, it may
increase the returns of NDLS in the near future. Based on these ratios, NDLS is in good financial
status and has upward trend. That is the reason why long strategy is applied for this stock.
Stock quote: NFLX
Period Ending
31-Dec-13 1-Jan-13 3-Jan-12
Current Ratio
1.42
1.34
1.50
Cash Ratio
0.28
0.17
0.41
Asset Turnover
0.86
0.91
1.04
Debt Ratio
0.75
0.81
0.79
Debt/Equity Ratio
3.06
4.33
3.77
Gross Profit Margin 0.30
0.27
0.36
Net Profit Margin
0.03
0.00
0.07
Figure 2.2: Adapted from Yahoo Finance (Shortcut from full data)
Current ratio and cash ratio show that NFLX manages its debt well and can meet short term
obligations with current assets. However, the dependence of NFLXs assets on debt finance is
very high, which means NFLX assets are financed by mostly debts. In order to apply tax shield
strategy, NFLX focuses on investment and acquires assets by debts. The company is doing well,
proven by consistent profit margin and increasing net profit margin. This companys stock is
expected to increase in long term due to its large scope and stability.
b. Technical Analysis
Besides fundamental analysis, technical analysis was also applied in considering a trading
decision for a stock. In other words, technical analysts approach the stock by it past behavior

and market psychology rather than its intrinsic value. Time scales used are intraday, weakly (5
business days), monthly.
Tools: Chart patterns double bottoms, cup and handle, and applying the importance of
volume on tracking further movement.
The further illustrations of trading based on technical analysis is fully explained in the Appendix
1b.
IV. Risk Profile1
There are three main factors will be discussed in this part:
1. Firm- specific factors: In terms of portfolio management, we tend to behave in a way of
avoiding adding high-risk stocks to our portfolio and look for safer investments. Perhaps,
$5,000 (10% of the initial cash investment) is the level of financial risk that firm can
afford to take. And there is only $1,500 (3% of the initial cash investment) or less that
firm is willing to loss. For the require rate of return per level of risk, we will discuss more
on the Treynor ratio analysis.
2. Industry wide factors: We currently choose the safest industry in order to avoid risky
stocks. However, we are still choose some risky industries which are predicted to make
more profits and to avoid the risks of these choices, we tend to use the derivatives
products in order to hedge our risks such as Options and Futures which will be discussed
more on the next part.
3. Economy-wide factors:
Real GDP:The GDP of US varies times by times and it creates many potential risks. For
the detail analysis, it refers to the Appendix 2.
Interest Rate:When interest rate is high, money will be shifted from higher risk
instrument to save or deposit account. Therefore, it is very difficult to forecast long term
future interest rates accurately. (See Appendix 2)
Inflation risk:The investors should consider the variance of inflation due to the
uncertainty of the inflation in previous years and the behaviors of people toward to
change in inflation. (See Appendix 2)
V.

Overall evaluation
1. Portfolio Performance
a. Comparison of portfolio expected returns and actual return in weekly basic.

Rp
Rf
Rm

Week 1
Week 2
Week 3
0.047%
0.051%
0.053%
0.038%

0.034%

0.027%

0.046%
0.046%
0.046%
1.15653803 1.482963406 1.398001833

Week 1
Week 2
Week 3

Actual Return
-0.03%
2.89%
6.33%

Figure 3: Expected Return and Actual Return of portfolio (Reproduced from Market Watch data).

Risk Profiling: is a process for finding the optimal level of investment risk considering the risk required, risk
capacity and risk tolerance, where:
Risk required: is the risk associated with the return required to achieve the clients goals from the
financial resources available.
Risk capacity: is the level of financial risk that the client can afford to take.
Risk tolerance: is the level of risk the client is comfortable with.

Assumptions: Due to short-term trading (1 month), this report will consider the risk free rate as
the three-month Treasury bill rate. (WRDS Help Desk, Wharton University)
In the last week of our trading, we have the expected return of the portfolio is 0.053% but our
portfolio over performed; it was 6.33% in return. In addition, the historical data also states the
good signals of our portfolio when the trend of the actual return is same with the trend of the
expected return. Our Beta was kept around 1.34; it means that we were considered the
correlation of the stocks put into our portfolio. Moreover, we expect to control the Beta but
still earn a higher return by using the derivatives products such as Options and Futures.
b. Calculate risk-adjust-return:
Treynor ratio2
Week 1
Week 2

Week 3

Weighted Beta

1.156538

1.482963

1.398002

Portfolio return

-0.03

2.89%

6.33%

Risk Free Rate

0.04%

0.03%

0.03%

Treynor

-2.627%

1.926%

4.509%

Figure 4: Treynor Ratio (Reproduced from Market Watch data).

Based on table above this ratio was increased every week dramatically. So, our portfolio was
the best performance efficiency in week 3. While, the risk of portfolio was quietly increased,
comparing to the return of portfolio was a big increased from -0.03% to 6.33%. Consequently,
the investors can receive high return on each market risk that those people have taken and the
stock has been well evaluated.
Sharpe ratio
Sharpe ratio determines the risk adjusted return of the portfolio by taking account of its
standard deviation in order to identify the real return of the portfolio. Comparing the
portfolio including NFLX and the portfolio including NDLS will evaluate the performance of
each portfolio and also each stock NFLX and NDLSs adjusted return. (See Appendix 6)
2. Risk evaluation- risk control plan
a. Predict the possible risk
The unexpected downtrend of the stocks within the portfolio is one of the main possible risks
that the portfolio manager should consider. In this portfolio, due to the bad news on the
market such as the issue of financial report of the first quarter of Weibo (WB) which stated that
the loss of WB in initial 2014 was over twice times in comparison with the previous year
(Marketwatch.com, 2014). This information will affect significantly the WBs stock price.
However, many market analysis claims that the prices of micro devices companies such as
Celgene, Weibo, SunPower, and Time Warner will increase due to the potential performance in
the price changes in the past data (Online.wsj.com, 2014). Thus, it should be hedged to avoid
risk.

Treynor Ratio measures how an investment has remunerated its investors given its level of systematic risk. The
higher ratio, the better the portfolio.

Additionally, the performance of NASDAQ index gradually increase from 2010 up to now. It is
the good signal for us to put money in the stocks listed on NASDAQ. However, the gradual
increase of NASDAQ may contain a downturn in short-run due to some bad events in the
market. Therefore, as a risk averse investor, we will have a plan to hedge the risk of the index
using Futures.
b. Strategies to hedging the potential loss/ risk exposure
To hedge our potential risks, we applied two derivatives products which are Options and
Futures. Here, we use the Options for Weibo (WB) stock and the Futures for the sub-portfolio
which related to the stocks on NASDAQ.
Options
Figure 5: Stock price in 3 months (reproduced from Market Watch)
Based on technically analyzingWeibo Corps trend, the graph
showed WB shares had an increasing trend starting from July.
Hence, 200Weibo Corp shares were bought at the price of $19.95
per share on August 15th. However, it turns out WB shares was at
peak at the time bought and decreases continuously afterwards.
On August 26th, the share price is $19.38 per share which made a
loss of 0.57/share. To hedge the risk, option contracts are
applied. As price is expected to decrease, 150 long put options
are bought on August 26th with expiration date on September
20th. The strike price is at $23 with premium of $3.
Looking at the trend over 3 month time, its price never reaches
23 and even 20 during 2 weeks lately. Hence, if deducting
$3/share premium, it is likely to get profit as the exercise price
has a high chance to be higher than the market price (stockprice
on the exercise day is expected to hardly get to 20).
Figure 6: WB stock price in 6 months (reproduced from Market Watch)
On the other hand, if stock price increases, it is
good for holding WB stock but not good for its long
put options. Long other 50 call options will hedge
the risk of price increasing. Based on 6 month data,
$17.5 was WBs worst case but most of the time
WB fluctuates between $19 and $21. Long call
options at $18 is the ideal strike price as stock price
will be most likely more than $19 if increasing or
even $19.95 to break even ($1.95 premium). This
hedging strategy called the long strangle applies
perfectly in the scenario of the stock price
Figure 7: Options Strategy (reproduced from
fluctuation as both call options and put options are bought for the same underlying
security but
Market Watch)
with different strike prices. The straddle is less expensive than straddle when the stock is out of
the money. This strategy will limit the total loss to cost of both options which is $4.95 per share
or $10,200 in total but offer unlimited potential profit. Refer to the current Call and Put Options
price charts Appendix 3a.

Futures
Our sub-portfolio includes stocks that listed on NASDAQ. Beta of portfolio is 1.31. The risk may
expose is the price moving downward in future. We protect our impressive profit by entering a
stock index future hedge. On 29 August 2014, we enter a short future contract. We sell
NASDAQ 100 future contract at 4,083 mature on 14 September 2014, current value of subportfolio $ 63,525.95. Number of contract use to hedge portfolio is 1. For more details see
Appendix 3b.
There are about some scenarios that market could drive the price of NASDAQ index in different
directions on September 14th.

NASDAQ index decrease to 3,800, the portfolio also decline in its value ($ 37,766.99)
but we make $ 28,300 profit on short sell our NASDAQ 100 index future contract. The
total value of portfolio still equals to current market value adjust the risk free rate
(63,525.95*0.04= $ 66,066.99)
Market goes upswing, NASDAQ index jumps to 4,300, value of portfolio raises to $
87,766.99. The gain on portfolio sufficiently covers the loss of short sell on future
contract. Thus, our total gain remain to $ 66,066.99

VI. Reflection
During our daily trading, the choice of our stocks is depended mainly on the technical and
fundamental analysis which used the past data in order to calculate the expected return of the
stocks as well as diagnose the health of the companies that we invested in. However, the
analysis could be affected by other unexpected news which made the stocks price went down
dramatically or increase significantly. As a result, it made a significant loss on our portfolio. This
is a valuable lesson that we had learnt during our trading, it also reminds us to consider the
risks even with the best performance stocks. (Refer to the full explanation in Appendix 7)
Additionally, the portfolio is better when we use the derivatives products to hedge the risk.
Finally, we understood that Futures can hedge the overall risk of the portfolio. By using Futures,
investors can to have a specific return at a specific future time. However, Futures are a zerosum game so that if the investors want to enjoy the return as the market, they should not use
Futures. Moreover, the lesson here is that the investors can have a higher return but still at a
controllable risk level if they know how to use derivatives products effectively.
VII. Conclusion
In conclusion, one of the most important factors in trading portfolio success is risk
management. Our portfolio was constant in the first 2 week period due to lack of analyzing and
determining risk factors and risk management. However, after applying trading strategies as
fundamental and technical analysis to understand the companies financial positions combining
with risk evaluation in the next week, our portfolio increased by 6.33%. However, there are still
some stocks as WB stock whose movement goes beyond our expectations. Risk management
strategies including options and futures are applied to hedge these risk exposures. With risk
hedging, loss is minimized and our portfolio equitys return is ensured to maintain in stable
condition as well as ourpre-trading analysis and strategies are strengthened with certainty.

VIII.

Appendices

1. Appendix 1: Trading Strategy

a. Appendix 1a: Fundamental Analysis
Stock quote: NDLS
Period Ending
Total Current Assets
Total Current Liabilities
Cash And Cash Equivalents
Total Assets
Total Revenue
Total Liabilities
Total Stockholder Equity
Gross Profit
Net Profit after Tax
Current Ratio
Cash Ratio
Asset Turnover
Debt Ratio
Debt/Equity Ratio
Gross Profit Margin
Net Profit Margin

Dec 31, 2013

Jan 1, 2013
18,333
16,154
24,165
23,760
968
581
187,802
156,995
350,924
300,410
63,329
142,987
124,473
10,407
75,741
66,275
6,665
5,163
0.76
0.68
0.04
0.024
1.87
1.91
0.34
0.91
0.51
13.74
0.22
0.22
0.02
0.017
Figure 8: Adapted from Yahoo Finance

Jan 3, 2012
12,879
20,557
523
126,325
256,066
118,802
4,951
56,936
3,829
0.63
0.025
2.03
0.94
24
0.22
0.015

The current Ratio of NDLS increases continuously during 2 year period as well as cash ratio
(nearly double from 2012-2013). This shows the company has good capability to meet short
term obligations and NDLS is in good financial health as it manages its operating cycle well by
generating enough short term assets or cash to pay its debt. However, asset turnover reduced
over time which means the company does not use the asset efficiently enough to generate
sales. However, according to CSI market, the restaurant industry asset turnover is between
1.06 and 1.09 in 2013 and 2014, which is much lower than NDLSs asset turnover. Therefore,
the companys fixed assets are still deployed efficiently compared with the industry. Next, debt
ratio measures the overall financial risk level or the leverage of the company. The ratio was
very high in 2012 and the beginning of 2013, nearly 1, and then it was 3 times less at the end of
2013, only 0.34. This means the company is much less dependent on total debt to gain the
return on asset but still generate return above its cost of capital. Its profit margin stays the
same and net profit margin after taxes is higher than before. Another leverage ratio, which is
debt equity ratio measures the level of total liabilities compared with total shareholders
equity. Compared with 24 in 2012, the leverage NDLS used at the end of 2013 at 0.54 was
significantly low, which proves the company strong equity position. Based on these ratios, NDLS
is in good financial status and has upward trend. That is the reason why long strategy is applied
for this stock.
Stock quote: NFLX
Period Ending
Total Current Assets
Total Current Liabilities
Cash And Cash Equivalents

Dec 31, 2013

3,058,763
2,154,203
604,965

Jan 1, 2013
2,240,791
1,675,926
290,291

Jan 3, 2012
1,830,857
1,225,055
508,053

Total Assets
Total Revenue
Total Liabilities
Total Stockholder Equity
Gross Profit
Net Profit after Tax
Current Ratio
Cash Ratio
Asset Turnover
Debt Ratio
Debt/Equity Ratio
Gross Profit Margin
Net Profit Margin

5,412,563
3,967,890
4,374,562
3,609,282
4,079,002
3,223,217
1,333,561
744,673
1,291,306
983,416
112,403
17,152
1.42
1.34
0.28
0.17
0.86
0.91
0.75
0.81
3.06
4.33
0.3
0.27
0.03
0.0048
Figure 9: Adapted from Yahoo Finance

3,069,196
3,204,577
2,426,386
642,810
1,164,676
226,126
1.5
0.41
1.04
0.79
3.77
0.36
0.07

Fundamental analysis is also applied in NFLX stock. The current Ratio of NFLX fluctuated
between 1.3 and 1.5, more than 1.This shows the company has a consistent ability to pay short
term debt with the most liquid assets. Cash ratio is also high during the period, more than 0.1.
However, the ratio was very high in 2012 and starts to decrease over time to 0.28 at the end of
2013. A decrease in current or cash ratio does not mean a negative issue. These ratios are still
high enough to cover the short term liabilities but decreases in order to utilize cash in other
investment. Asset turnover also reduced from 1.04 to 0.86 in 2013; being lower than 1 means
the companys generated sales from available assets do not compensate the investment in
assets because the assets are not deployed efficiently. However, based on CSI markets data,
the ratio is still higher than the asset turnover of the industry which is only 0.6.
Debt ratio, leverage of the company was consistently around 0.7 and 0.8. The dependence of
NFLXs assets on debt finance is very high as the acceptable level of debt ratio falls in the range
of 0.3-0.4 but debt equity ratio decreased. NFLX assets are financed by mostly debts. This does
not mean NFLX is in weak financial position but the company focuses on investment and
acquires assets by debts in order to apply tax reduction strategy. It is proven by consistent
profit margin and increasing net profit margin.
NFLX Revenue
Comparisons

Growth

Rate

Company Industry Sector

S&P 500

Y / Y Revenue Growth (Q2 MRQ)

25.35 %

13.46 % 6.76 % 4.64 %

Q / Q Revenue Growth (Q2 MRQ)

5.54 %

3.97 %

Y / Y Revenue Growth (Q2 TTM)

24.04 %

11.62 % 5.33 % %

Seq. Revenue Growth (Q2 TTM)

5.87 %

3.14 %

Revenue 5 Year Average Growth

26.24 %

13.43 % 6.55 % 2.5 %

Expected Revenue Growth (Y/Y)

17.8 %

0.53 % 3.14 %

1.58 % 1.12 %

10.05 % 5.75 %

Figure
10:
Reproduced
from: CSI Market

Figure 11: Reproduced from: CSI

Market
In contrast to NDLS, fundamental analysis on NFLX does not provide enough information to
make a trading decision as the company has high debt and debt equity ratios. Comparing the
companys status with its Internet and Computer service industry will gain a deeper insight. All
NFLX revenue growth rates nearly doubled the industry growth rates. Other growth ratios
including gross profit, operating profit, net income and EPS growth are much higher than the
industry and also the stock index S&P 500. Combining company analysis and comparison with
the industry, NFLX is doing well and has different financial strategy in different industry with
stock NDLS, going long this stock is optimal for diversification and getting profit.
b. Appendix 1b: Technical Analysis
Highlight Transactions
HES: Buy at $97.59 on 18th August when the chart decline but not yet met the supported line at
price $97.53. The graph (Figure 12) indicates a typical pattern- the double bottoms. Reviewing
the 3-month price chart of HES from May to August 2014, it is noticeable that there was an
upward trend while the pattern repeated itself 2times (Figure 13). Thus, it was expected that
the price $97.59 would be the second bottom and the stock price would be bottom-up. The buy
decision made there.
After one day of trading, the price did increase to $99.29. Because of the concern of price
voluntary, we sole stocks and earned a profit $1.8 each.
SSI: long at $16.33 on 22nd August
The price had dropped continuously for a few days. Then on 21 August, the volume of SSI
about three time to the last trading day, which could be a sign that the trend could stop it
downward trend and reverse. However, the volume is much higher than the average daily
volume in one-month time. It would conclude that the true trend reversal was lack of
conviction. Then the trend probably reached the bottom at $16.33. The price rose after then.
The chart pattern showed a cup and handle chart, which expect to be bullish in an upward
direction in a short day. Trading decision was buy and hold till this chart pattern is confirmed
and price rising. (Figure 14)

Figure 12:

Figure 13:

Figure 14:

2.
Appendix 2: Risk
Profiles
Economy-wide factors:
Real GDP:
The graph showed a dramatically
increase during six months until
June in 2014 as real GDP of US in

June 2014 was 16.04 trillion. According to Ycharts, a monthly annualized growth rate of US is
3.84%, so that it is expected to be 17.27 trillion in August. This can demonstrate that GDP
increase every month as well as the positive income of American people. However, in long
terms view, the GDP of US varies significantly from year to year due many systematic risks such
as disasters, wars, diseases and even terrorism.
Figure 15 +16: Reproduced from Trading Economics

Interest Rate:

Figure 17: Reproduced from OECD.StatExtra

Based on OECD StatExtra (2014), interest rate in US
was variable from last 4 months and it was 2.54% in
July. When interest rate is high, money will be
shifted from higher risk instrument to save or deposit account. Besides that when interest rate
is low, it tends to invest in stock market in hope of getting a higher return. Therefore, it is very
difficult to forecast long term future interest rates accurately.

Inflation risk:

US's Inflation Rate

(2014)

Figure 18 :Reproduced from Statista 2014

According to inflation data (2014), inflation rate dropped

sharply over the last three months. As the prices rose at
a lower rates, the higher purchasing power of
0.68
consumers. Actually, the more certainty and less
13.74 confusion encouraging investment as well as growth in
US market. However, in long term investment, the
1.91
0.91
0.024
investors should consider the variance of inflation due to
0.04
1.87
0.34
0.51
the uncertainty of the inflation in previous years and the
behaviors of people toward to change in inflation.

Figure 19: Reproduced from Trading Economics

3. Appendix 3: Hedging Risks

a. Appendix 3a: Options Tables
Figure 20: Call
Strike
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
18.00
19.00
20.00
21.00
22.00
23.00
24.00
25.00
26.00
27.00
30.00
35.00

Price
9.42
5.00
5.50
3.70
1.95
1.00
0.60
0.40
0.20
0.20
0.10
0.33
0.20
-

Change
+0.12
0.00
0.00
0.00
0.00
0.00
0.00
+0.05
-0.06
0.00
0.00
0.00
0.00
-

Bid
9.20
6.30
5.50
4.50
3.90
4.20
3.20
2.20
1.45
0.95
0.55
0.35
0.10
0.05
-

Ask
9.90
10.80
9.20
8.20
7.20
4.90
3.80
3.10
2.00
1.10
0.65
0.40
0.30
0.20
0.25
0.25
0.25
0.25
0.25
0.25

Volume
21
86
33
5
-

Open Int
45
0
0
0
0
20
19
20
15
237
2097
2838
1702
548
129
8
3
0
0
0

Figure 21: Put

Strike
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
18.00
19.00
20.00
21.00
22.00
23.00
24.00

Price
0.01
0.25
0.18
0.13
0.30
0.70
1.35
2.10
2.55
3.00
-

Change
0.00
0.00
0.00
-0.07
-0.10
-0.12
-0.05
+0.10
0.00
0.00
-

Bid
0.10
0.25
0.70
1.25
1.95
2.55
3.40
3.70

Ask
0.25
0.25
0.25
0.30
0.25
0.20
0.20
0.20
0.35
0.75
1.40
2.20
3.10
4.10
5.60

Volume
20
27
17
10
10
-

Open Int
0
0
0
0
4
337
211
782
985
1055
955
599
15
5
0

Strike
25.00
26.00
27.00
30.00
35.00

Price
-

Change
-

Bid
4.60
5.60
6.60
9.10
15.00

Ask
6.60
7.60
8.60
12.60
16.10

Volume
-

Open Int
0
0
0
0
0

b. Appendix 3b: Futures

Symbol

Price

AXAS
INTC
NDLS
NFLX
QCOM
WB
Portfolio

$
$
$
$
$
$

5.81
34.81
19.85
480.00
76.02
19.73

Volume Market value % Holding

1,040
100
307
71
130
200

$
$
$
$
$
$
$

6,042.40
3,481.00
6,093.95
34,080.00
9,882.60
3,946.00
63,525.95

9.51%
5.48%
9.59%
53.65%
15.56%
6.21%

Beta
3.29
1.22
0.8
1.08
1.13
1.63
1.31

Figure 22: Table of stock index sub-portfolio listed on NASDAQ calculation.

NASDAQ 100 index
Level Gain/Loss
3,800
-6.80%
3,900
-4.34%
4,077
0.00%
4,200
3.01%
4,300
5.47%

Future contract
Gain/Loss
$
28,300
$
18,300
$
585
$
(11,700)
$
(21,700)

Portfolio
Value
$ 37,766.99
$ 47,766.99
$ 65,481.99
$ 77,766.99
$ 87,766.99

Total
Value
$ 66,066.99
$ 66,066.99
$ 66,066.99
$ 66,066.99
$ 66,066.99

Figure 23.1: NASDAQ 100 index future contract gain/loss in different scenarios.
# Contract =

= (0.20).

Assumption: the future contract hedge perfectly with market Beta = 0

Market risk free rate of 3-month Treasury bill
Figure 23.2: The Formulas for calculation
4. Appendix 4: Trading diary
Day 8 to 12th August 2014:
th

Transaction 1 and 2: Learning from 3-month price performance chart of BMY that the
chart increase upward and some repeated head and shoulders occurred. When price
reached the head from below and it started to bottom-up on 8th August. There was an
expected that price would increase in future with an upward trend. We bought 47 BMY
shares at $48.94 and plan holding.
However, there was some problems occurred after the buying action. BMY shares sold
at $48.92 and make a loss. This raised a concern of technical risk and personal mistake
which might expose when managing portfolio.

Transaction 5: 1month chart of GM fluctuates in an upward trend. Therefore, chartist

expects that price could increase in future. The buy (200 shares, price $33.59)-and-hold
action was applied here.
Day 18th August 2014:
Transaction 1: 1040 AXAS shares were brought at price $ 5.45. Price performance
speeded gradually after the great reduction. The chart of 6months price showed that
the pattern of price approach the pick in about a month time after approaching its
resistance in 15th August. Basing on the past price behavior, technical analyst believes
that price will bullish and repeat it movement.
Transaction 2: We bought 90 HES shares at 97.59 basing on the technical pattern of
double bottoms of price movement in 3 months time.
Transaction 3: from a consideration mainly on fundamental analysis, a decision was
made of buying 307 NDLS shares at $ 20.78.
Transaction 5: Learning that General Motors may suffer from Russian retaliatory for the
US punishments, we sold 200 shares of GM on price $34.33. This expected to protect
the loss of price downturn.
Transaction 12: 150 shares of AAP were bought at $132.23. the gap between Hulbert
interactive and analyst on sentiment is really small and closes to bullish. Those consider
as a sign of generating possible profit on buying APP shares

Day 19th August, 2014

Symbol
QCOM
RRGB
NFLX
ORCL
HES
JWN
BPT
AAP
Figure 24:

Order Date & Time

8/19/14 12:13p
8/19/14 12:12p
8/19/14 10:55a
8/19/14 10:48a
8/19/14 10:48a
8/19/14 10:48a
8/19/14 10:44a
8/19/14 9:54a

Trans Date & Time

8/19/14 12:13p
8/19/14 12:12p
8/19/14 10:55a
8/19/14 10:48a
8/19/14 10:48a
8/19/14 10:48a
8/19/14 10:44a
8/19/14 9:54a

Type
Buy
Sell
Buy
Sell
Sell
Sell
Buy
Sell

Shares
130
175
71
200
90
124
140
150

Exec Price
$75.03
$54.32
$465.44
$41.04
$99.28
$67.32
$92.20
$134.17

Transaction 1: AAP stock was bought at $132.23 on 18th August. On 19th, the stock was
increased by $1.94 per share. We sold the shares as based on technically analyzing the graph of
3 month stock price movement, we expected it has had increasing trend but may reach the
peak and would decrease afterwards. Furthermore, on 19 th there was news that most
technology stocks of big corporations as INTC, COMP, DJIA, GOOG and HPQ declined in price.
Hence, we sold all the shares 1 day later to earn instant profit.
Transaction 2: 140 BPT stocks were bought. As BPT fell to the bottom at the end of July, it tried
to recover afterwards with continuously gradual increase. We bought BPT stock because we
predicted that BPT stock would continue to increase as it would not reach the peak yet.

Transaction 3: We bought 124 JWN stock at $65.58 on 17th and sold out on 19th at $67.32. Day
22nd August 29, 2014. In Mid-August, the stock plunged to the price at $65, the lowest price
ever. Although the price recovered then, we still predicted that the stock would stop increasing
and stay constant or even decline due to the news stating that Nordstrom (JWN) was among
top S&P 500 losers with the most significant drop which further reduce the shareholders belief.
Transaction 4: We sold 90 HES stocks at $99.28 which were bought at $97.59 on 18 th. HES stock
fluctuated during August which seemed to increase and decrease on a daily basis. Hence, we
bought the stock when the stock decreased and sold immediately when it increased to earn
profit before it declined again.
Transaction 5: We continued to sell 200 ORCL stock at $41.04 as it had the same declining trend
as AAP stock as well as other technology stocks. The stock increased to same level as in July
which signaled the following drop. Hence, we sold ORCL one day after buying as soon as it
increased compared to the price bought.
Transaction 6: We bought 71 NFLX stocks at very high price at $465.44. As Netflix is a big
corporation and its high market price, we have to consider many issues before buying due to
our limited fund. After looking at 3 month stock price, its stock started to increase at the
beginning of August but we were not certain whether it reached the peak or not. We also had
to apply fundamental analysis and compare the companys financial status with industry in
order to determine NFLX intrinsic value. NFLX is concluded to be in good financing and would
continue to increase. Hence, long strategy is applied for this stock.
Transaction 7: We sold 175 RRGB stocks at $54.32 as it did not meet our expectations. We
bought RRGB as we thought after a 20% tumbling in mid-August, the stock would increase.
However, the stock just made a little recovery and stayed constant afterwards. We realized that
the stock did not gain any more profit so selling all to fund other profitable stock is necessary.
Transaction 8: 130 QCOM stocks were bought on 19th as QCOM in June and July had very high
market price. However, in August, the price decreased significantly which was a great
opportunity for us to buy good stock at low price. Moreover, we believe that the stock will
increase because based on the trend, it continuously increased from the plunge. Also the news
stated that Qualcom was the monopoly on wireless technologies and invested in China, which
was a potential market. However, due to dispute, the price plunged but we believe the dispute
was soon to be solved and its price would increase.
Day 22nd August, 2014
Symbol
SSI
HPQ
ABX
PFE
ARO
Figure 25:

Order Date & Time

8/22/14 10:34a
8/22/14 10:34a
8/22/14 10:33a
8/22/14 10:32a
8/22/14 10:32a

Trans Date & Time

8/22/14 10:34a
8/22/14 10:34a
8/22/14 10:33a
8/22/14 10:32a
8/22/14 10:32a

Type
Buy
Sell
Cover
Sell
Buy

Shares
753
300
40
20
420

Exec Price
$16.33
$36.79
$18.30
$28.97
$3.55

Transaction 1: We bought 420 ARO price at $3.55. The reason why we bought so many stocks
as its low price compared with other stocks and its increasing trend starting from mid-August.
The change in the management board as Julian R.Geiger became its chief executive boosted the

share price growth as he used to be the leader of Aeropostales strategic direction and brought
significant profit to the company. His involvement in the company signals the consequent
development of the company and its share price will continue to go up.
Transaction 2: We bought 20 PFE shares at $28.16 on 8th and sold 20 PFE shares at $28.97 on
19th. During 11 day period, there is little change in the stock price. Also the news of tax
inversions hit company Pfizer (PFE) negatively. Hence, we decide to sell as it does not make
much profit and has a risk of declining.
Transaction 3: On 11th, we short sold 40 ABX stocks at $18.66 as we expected the stock price
would decrease. However, the stock price kept going up afterwards and had no sign of
decreasing. There was also no news for us to predict the next price movement. As a result, we
had to buy back ABX stock to cover the short sell position at higher price to limit the loss if price
continued to increase.
Transaction 4: 300 HPQ stocks are sold out at $36.79. As other technology stocks had a
downward trend, HPQ did not show much decrease. It seemed to remain stable because HPQ is
a big technology corporation which seemed to be little affected. Hence, though we sold many
other technology stocks, we still held HPQ and waited until it increased. However, due to
Ukraine fear, technology stocks were again negatively affected. We realized that technology
market continuously met challenges so on 22nd August, when HPQ stock increased, we
immediately sold it to limit risk of holding stock and earn profit.
Transaction 5: We bought 753 SSI shares at $16.33. After its deepest plunge ever, we bought
immediately when we realized it was making recovery. The stock price decreased as Stage
Stores Inc. (SSI)s profit fell 18% because the retailer was charged higher cost. However buying
SSI stock at such low price, applying buy low sell high strategy to this stock is optimal.
5. Appendix 5: Portfolio: Beta and Return in weekly basis
Week 1
Beta
Shares
(11/08)
WB
0.036617748
AEO
0.83
INTC
0.84
FC
1.99
GM
1.77
Total
Figure 26: Portfolio in week 1 (from 11/08 to 15/08)
Week 2
(17/08)
WB
AEO
INTC
FC
GM
QCOM
NFLX

Beta

Shares
0.036617748
0.83
0.84
1.99
1.77
0.89
2.26

Price
200
50
100
100
200

Value

19.95
10.82
34.03
19.21
33.59

3990
541
3403
1921
6718
16573

Price

Value

weighted

WBeta

0.240753032
0.032643456
0.205333977
0.115911422
0.405358113

0.008816
0.027094
0.172481
0.230664
0.717484
1.156538

200 19.95
3990
50 10.82
541
100 34.03
3403
100 19.21
1921
200 33.59
6718
130 75.03
9753.9
71 465.44 33046.24

weighted

WBeta

0.036007815
0.004882263
0.030710424
0.017336093
0.060626691
0.088024216
0.298226286

0.001319
0.004052
0.025797
0.034499
0.107309
0.078342
0.673991

BPT
0.69
AXAS
2.82
NDLS
0.464
TM
0.73
HPQ
1.72
Total
Figure 27: Portfolio in week 2 (from 17/08 to 21/08)

Week 3
Beta
Shares
(24/08)
WB
0.036617748
AEO
0.83
INTC
0.84
FC
1.99
QCOM
0.89
NFLX
2.26
BPT
0.69
AXAS
2.82
NDLS
0.464
TM
0.73
SSI
1.08
ARO
2.57
Total
Figure 28: Portfolio in week 3 (from 24/08 to 28/08)

140
92.2
12908
1040
5.45
5668
307 20.78 6379.46
100 117.21
11721
416 35.48 14759.68
110809.3

Price

Value

200 19.95
3990
50 10.82
541
100 34.03
3403
100 19.21
1921
130 75.03
9753.9
71 465.44 33046.24
140
92.2
12908
1040
5.45
5668
307 20.78 6379.46
100 117.21
11721
753 16.33 12296.49
420
3.55
1491
103119.1

0.116488439
0.051150951
0.057571532
0.105776339
0.133198952

0.080377
0.144246
0.026713
0.077217
0.229102
1.482963

weighted

WBeta

0.038693127
0.005246361
0.033000679
0.018628946
0.094588694
0.320466754
0.125175659
0.054965574
0.061864976
0.113664696
0.119245525
0.01445901

0.001417
0.004354
0.027721
0.037072
0.084184
0.724255
0.086371
0.155003
0.028705
0.082975
0.128785
0.03716
1.398002

6. Appendix 6: Sharpe Ratio

Date
7-Aug-14
8-Aug-14
11-Aug-14
12-Aug-14
13-Aug-14
14-Aug-14
15-Aug-14
18-Aug-14
19-Aug-14
20-Aug-14
21-Aug-14
22-Aug-14
25-Aug-14

Mean Excess Return

Portfolio
-0.06%
-0.02%
-0.11%
0.05%
0.04%
-0.10%
0.20%
1.59%
2.79%
4.54%
5.33%
6.33%
6.33%

1.20%

NFLX
0.045015106
-0.00849512
0.01276214
-0.01136112
0.011469277
-0.0014617
0.018231419
0.015051515
0.004613734
0.008629713
-0.00029649
0.015125516
0.003631128

Excess
Excess
Returns
NDLS
Return
-4.56%
0.20%
-0.002552881
0.83%
1.66%
-0.016819013
-1.39%
1.34%
-0.014503533
1.19%
4.47%
-0.044150943
-1.11%
0.51%
-0.004737465
0.05%
15.97%
-0.160650536
-1.62%
1.05%
-0.008506616
0.08%
3.12%
-0.015252622
2.33%
1.14%
0.016456922
3.68%
-0.22%
0.047619048
5.36%
4.69%
0.006363636
4.82%
7.69%
-0.013550136
5.97%
7.43%
-0.010989011

Mean Excess
Return

3.77%

Excess StDev
Sharpe

3.11%
0.39

Excess StDev
Sharpe

Figure 29: Sharpe Ratio Calculation Process

The portfolio if including NFLXs return continuously increased significantly in 2013.
However, the excess return does not measure the portfolio return accurately due to its
excess bearing risk as higher risk is compensated by higher return. NFLX stock is only a
good investment when risk adjusted performance is measured. After calculating the
Sharpe ratio, the return taking account of standard deviation and risk, was much less
compared with the excess return, only 0.39. Compared with the portfolio including NDLS
with high Sharpe ratio (0.87), NFLXs adjusted return is quite low. However, if the
portfolio including both NDLS and NFLX, the Sharpe ratio is high which means the risk
adjusted return of the portfolio improves significantly if including both stock in the same
portfolio.

7. Appendix 7: Reflection
During our daily trading, the choice of our stocks is depended mainly on the technical
and fundamental analysis which used the past data in order to calculate the expected
return of the stocks as well as diagnose the health of the companies that we invested in.
However, the analysis could be affected by other unexpected news which made the
stocks price went down dramatically or increase significantly. To illustrate for this, we
used the case of Oracle (ORCL) to explain. Indeed, we found out that ORCL is one of the
most favorite stocks in terms of financial ratios and profits (Insider Monkey, 2014).
Furthermore, this stock was also supported by the news of increasing in price of high
tech companies stocks (Braghis, 2014). However, some days later, the news that ORCL
involved in a lawsuit made the stock decreased dramatically (Armental, 2014) (Reuters,
2014). As a result, it made a significant loss on our portfolio. In this case, because of not
baring the huge loss, we decided to sell out the stock (Refer to the trading diary). This is
a valuable lesson that we had learnt during our trading, it also reminds us to consider
the risks even with the best performance stocks.
Additionally, the portfolio is better when we use the derivatives products to hedge the
risk. For instance, we had predicted that the WBs price would decrease in short term
but increase in long term. Therefore, to reduce the loss in short-term, we use options
(call options) to hedge risks (Refer to the above part) and this strategy is quite effective
when we still ensure the gain from our portfolio and also control the risk of decreasing
in price of WB.
Finally, we understood that Futures can hedge the overall risk of the portfolio. By using
Futures, investors can to have a specific return at a specific future time. However,
Futures are a zero-sum game so that if the investors want to enjoy the return as the
market, they should not use Futures. In our case, we are risk averse so that to ensure
our return, Futures are the best option. Moreover, the lesson here is that the investors
can have a higher return but still at a controllable risk level if they know how to use
derivatives products effectively.

4.32%
0.87

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