bafi 3192 assignment report 2015-a

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

strategy in order to facilitate our trading and have a better investment decision. Figure 1: Adapted from MarketWatch

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


Cash Ratio 0.28 0.17 0.41


Debt Ratio 0.75 0.81 0.79

Debt/Equity Ratio 3.06 4.33 3.77



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

Actual Return

Week 1 -0.03%

Week 2 2.89%

Week 3 6.33%

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.

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

1Risk 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.

Week 1 Week 2 Week 3

Rp 0.047% 0.051% 0.053%

Rf 0.038% 0.034% 0.027%

Rm 0.046% 0.046% 0.046%

1.15653803 1.482963406 1.398001833

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.

2Treynor 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

fluctuation as both call options and put options are bought for the same underlying security but

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.

Figure 7: Options Strategy (reproduced from

Market Watch)

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 sub-

portfolio $ 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 zero-

sum 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 Dec 31, 2013 Jan 1, 2013 Jan 3, 2012

Total Current Assets 18,333 16,154 12,879

Total Current Liabilities 24,165 23,760 20,557

Cash And Cash Equivalents 968 581 523

Total Assets 187,802 156,995 126,325

Total Revenue 350,924 300,410 256,066

Total Liabilities 63,329 142,987 118,802

Total Stockholder Equity 124,473 10,407 4,951

Gross Profit 75,741 66,275 56,936

Net Profit after Tax 6,665 5,163 3,829


Cash Ratio 0.04 0.024 0.025


Debt Ratio 0.34 0.91 0.94

Debt/Equity Ratio 0.51 13.74 24


Net Profit Margin 0.02 0.017 0.015 Figure 8: Adapted from Yahoo Finance

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 Dec 31, 2013 Jan 1, 2013 Jan 3, 2012

Total Current Assets 3,058,763 2,240,791 1,830,857

Total Current Liabilities 2,154,203 1,675,926 1,225,055

Cash And Cash Equivalents 604,965 290,291 508,053

Total Assets 5,412,563 3,967,890 3,069,196

Total Revenue 4,374,562 3,609,282 3,204,577

Total Liabilities 4,079,002 3,223,217 2,426,386

Total Stockholder Equity 1,333,561 744,673 642,810

Gross Profit 1,291,306 983,416 1,164,676

Net Profit after Tax 112,403 17,152 226,126


Cash Ratio 0.28 0.17 0.41


Debt Ratio 0.75 0.81 0.79

Debt/Equity Ratio 3.06 4.33 3.77



Figure 9: Adapted from Yahoo Finance

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.

Figure 10:

Reproduced

from: CSI Market

NFLX Revenue Growth Rate

Comparisons 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 % 0.53 % 3.14 %

Y / Y Revenue Growth (Q2 TTM) 24.04 % 11.62 % 5.33 % %

Seq. Revenue Growth (Q2 TTM) 5.87 % 3.14 % 1.58 % 1.12 %

Revenue 5 Year Average Growth 26.24 % 13.43 % 6.55 % 2.5 %

Expected Revenue Growth (Y/Y) - 17.8 % 10.05 % 5.75 %

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

0.024 1.91 0.91

13.74

0.04 1.87 0.34 0.51

US's Inflation Rate (2014)

0.68

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:

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

consumers. Actually, the more certainty and less

confusion encouraging investment as well as growth in

US market. However, in long term investment, 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.

Figure 19: Reproduced from Trading Economics

3. Appendix 3: Hedging Risks

a. Appendix 3a: Options Tables

Figure 20: Call

Strike Price Change Bid Ask Volume Open Int

10.00 9.42 +0.12 9.20 9.90 21 45

11.00 - - 6.30 10.80 - 0

12.00 - - 5.50 9.20 - 0

13.00 - - 4.50 8.20 - 0

14.00 - - 3.90 7.20 - 0

15.00 5.00 0.00 4.20 4.90 - 20

16.00 5.50 0.00 3.20 3.80 - 19

17.00 3.70 0.00 2.20 3.10 - 20

18.00 1.95 0.00 1.45 2.00 - 15

19.00 1.00 0.00 0.95 1.10 - 237

20.00 0.60 0.00 0.55 0.65 86 2097

21.00 0.40 +0.05 0.35 0.40 33 2838

22.00 0.20 -0.06 0.10 0.30 5 1702

23.00 0.20 0.00 0.05 0.20 - 548

24.00 0.10 0.00 - 0.25 - 129

25.00 0.33 0.00 - 0.25 - 8

26.00 0.20 0.00 - 0.25 - 3

27.00 - - - 0.25 - 0

30.00 - - - 0.25 - 0

35.00 - - - 0.25 - 0

Figure 21: Put


10.00 - - - 0.25 - 0

11.00 - - - 0.25 - 0

12.00 - - - 0.25 - 0

13.00 - - - 0.30 - 0

14.00 0.01 0.00 - 0.25 - 4

15.00 0.25 0.00 - 0.20 - 337

16.00 0.18 0.00 - 0.20 - 211

17.00 0.13 -0.07 0.10 0.20 20 782

18.00 0.30 -0.10 0.25 0.35 27 985

19.00 0.70 -0.12 0.70 0.75 17 1055

20.00 1.35 -0.05 1.25 1.40 10 955

21.00 2.10 +0.10 1.95 2.20 10 599

22.00 2.55 0.00 2.55 3.10 - 15

23.00 3.00 0.00 3.40 4.10 - 5

24.00 - - 3.70 5.60 - 0


25.00 - - 4.60 6.60 - 0

26.00 - - 5.60 7.60 - 0

27.00 - - 6.60 8.60 - 0

30.00 - - 9.10 12.60 - 0

35.00 - - 15.00 16.10 - 0

b. Appendix 3b: Futures

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

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 8th to 12th August 2014:

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.

Symbol Price Volume Market value % Holding Beta

AXAS 5.81$ 1,040 6,042.40$ 9.51% 3.29

INTC 34.81$ 100 3,481.00$ 5.48% 1.22

NDLS 19.85$ 307 6,093.95$ 9.59% 0.8

NFLX 480.00$ 71 34,080.00$ 53.65% 1.08

QCOM 76.02$ 130 9,882.60$ 15.56% 1.13

WB 19.73$ 200 3,946.00$ 6.21% 1.63

Portfolio 63,525.95$ 1.31

Future contract Portfolio Total

Level Gain/Loss Gain/Loss Value Value

3,800 -6.80% 28,300$ 37,766.99$ 66,066.99$

3,900 -4.34% 18,300$ 47,766.99$ 66,066.99$

4,077 0.00% 585$ 65,481.99$ 66,066.99$

4,200 3.01% (11,700)$ 77,766.99$ 66,066.99$

4,300 5.47% (21,700)$ 87,766.99$ 66,066.99$

NASDAQ 100 index

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 Order Date & Time Trans Date & Time Type Shares Exec Price

QCOM 8/19/14 12:13p 8/19/14 12:13p Buy 130 $75.03

RRGB 8/19/14 12:12p 8/19/14 12:12p Sell 175 $54.32

NFLX 8/19/14 10:55a 8/19/14 10:55a Buy 71 $465.44

ORCL 8/19/14 10:48a 8/19/14 10:48a Sell 200 $41.04

HES 8/19/14 10:48a 8/19/14 10:48a Sell 90 $99.28

JWN 8/19/14 10:48a 8/19/14 10:48a Sell 124 $67.32

BPT 8/19/14 10:44a 8/19/14 10:44a Buy 140 $92.20

AAP 8/19/14 9:54a 8/19/14 9:54a Sell 150 $134.17

Figure 24:

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 19th 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 18th. 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 Order Date & Time Trans Date & Time Type Shares Exec Price

SSI 8/22/14 10:34a 8/22/14 10:34a Buy 753 $16.33

HPQ 8/22/14 10:34a 8/22/14 10:34a Sell 300 $36.79

ABX 8/22/14 10:33a 8/22/14 10:33a Cover 40 $18.30

PFE 8/22/14 10:32a 8/22/14 10:32a Sell 20 $28.97

ARO 8/22/14 10:32a 8/22/14 10:32a Buy 420 $3.55

Figure 25:

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 (11/08)

Beta Shares Price Value weighted WBeta

WB 0.036617748 200 19.95 3990 0.240753032 0.008816 AEO 0.83 50 10.82 541 0.032643456 0.027094 INTC 0.84 100 34.03 3403 0.205333977 0.172481 FC 1.99 100 19.21 1921 0.115911422 0.230664 GM 1.77 200 33.59 6718 0.405358113 0.717484 Total 16573 1.156538

Figure 26: Portfolio in week 1 (from 11/08 to 15/08)

Week 2 (17/08)


WB 0.036617748 200 19.95 3990 0.036007815 0.001319

AEO 0.83 50 10.82 541 0.004882263 0.004052

INTC 0.84 100 34.03 3403 0.030710424 0.025797

FC 1.99 100 19.21 1921 0.017336093 0.034499

GM 1.77 200 33.59 6718 0.060626691 0.107309

QCOM 0.89 130 75.03 9753.9 0.088024216 0.078342

NFLX 2.26 71 465.44 33046.24 0.298226286 0.673991

BPT 0.69 140 92.2 12908 0.116488439 0.080377

AXAS 2.82 1040 5.45 5668 0.051150951 0.144246

NDLS 0.464 307 20.78 6379.46 0.057571532 0.026713

TM 0.73 100 117.21 11721 0.105776339 0.077217

HPQ 1.72 416 35.48 14759.68 0.133198952 0.229102

Total 110809.3 1.482963 Figure 27: Portfolio in week 2 (from 17/08 to 21/08)

Week 3 (24/08)


WB 0.036617748 200 19.95 3990 0.038693127 0.001417 AEO 0.83 50 10.82 541 0.005246361 0.004354 INTC 0.84 100 34.03 3403 0.033000679 0.027721 FC 1.99 100 19.21 1921 0.018628946 0.037072

QCOM 0.89 130 75.03 9753.9 0.094588694 0.084184 NFLX 2.26 71 465.44 33046.24 0.320466754 0.724255 BPT 0.69 140 92.2 12908 0.125175659 0.086371 AXAS 2.82 1040 5.45 5668 0.054965574 0.155003 NDLS 0.464 307 20.78 6379.46 0.061864976 0.028705 TM 0.73 100 117.21 11721 0.113664696 0.082975 SSI 1.08 753 16.33 12296.49 0.119245525 0.128785 ARO 2.57 420 3.55 1491 0.01445901 0.03716 Total 103119.1 1.398002

Figure 28: Portfolio in week 3 (from 24/08 to 28/08)

6. Appendix 6: Sharpe Ratio

Date Portfolio NFLX Excess Returns NDLS

Excess Return

7-Aug-14 -0.06% 0.045015106 -4.56% -0.002552881 0.20%

8-Aug-14 -0.02% -0.00849512 0.83% -0.016819013 1.66%

11-Aug-14 -0.11% 0.01276214 -1.39% -0.014503533 1.34%

12-Aug-14 0.05% -0.01136112 1.19% -0.044150943 4.47%

13-Aug-14 0.04% 0.011469277 -1.11% -0.004737465 0.51%

14-Aug-14 -0.10% -0.0014617 0.05% -0.160650536 15.97%

15-Aug-14 0.20% 0.018231419 -1.62% -0.008506616 1.05%

18-Aug-14 1.59% 0.015051515 0.08% -0.015252622 3.12%

19-Aug-14 2.79% 0.004613734 2.33% 0.016456922 1.14%

20-Aug-14 4.54% 0.008629713 3.68% 0.047619048 -0.22%

21-Aug-14 5.33% -0.00029649 5.36% 0.006363636 4.69%

22-Aug-14 6.33% 0.015125516 4.82% -0.013550136 7.69%

25-Aug-14 6.33% 0.003631128 5.97% -0.010989011 7.43%

Mean Excess Return 1.20%

Mean Excess Return 3.77%

Excess StDev 3.11%

Excess StDev 4.32%

Sharpe 0.39

Sharpe 0.87

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.

IX. Reference List

Armental, M. (2014). Oracle $1.3 Billion Jury Verdict in SAP Case Reduced. [online] WSJ.

Available at: http://online.wsj.com/articles/oracle-denied-1-3-billion-jury-verdict-in-long-

running-sap-case-1409343091 [Accessed 31 Aug. 2014].

Braghis, A. (2014). Microsoft Corporation (MSFT), Oracle Corporation (ORCL) and Aon PLC

(AON): First Pacific Advisors Top Stock Picks - Insider Monkey. [online] Insider Monkey.

Available at: http://www.insidermonkey.com/blog/microsoft-corporation-msft-oracle-

corporation-orcl-and-aon-plc-aon-first-pacific-advisors-top-stock-picks-326017/ [Accessed

31 Aug. 2014].

Csimarket.com, (2014). Netflix (NFLX) Fundamental Analysis, Stock Research, Fundamental

Ratios - CSIMarket. [online] Available at:

http://csimarket.com/stocks/fundamentals_glance.php?code=NFLX [Accessed 25 Aug.

2014].

Csimarket.com, (2014). Restaurants Industry Efficiency, Revenue per Employee, Inventory and

Receivable Turnover Ratios Q2 2014. [online] Available at:

http://csimarket.com/Industry/industry_Efficiency.php?ind=914 [Accessed 25 Aug. 2014].

FinaMetrica, (2014). Risk Profiling Art and Science United State Version. [online] Available at:

https://www.riskprofiling.com/WWW_RISKP/media/RiskProfiling/Downloads/Risk_Profilin

g_-_Art_and_Science_US.pdf [Accessed 19 Aug. 2014].

Finance.yahoo.com, (2014). NDLS Balance Sheet | Noodles & Company Stock - Yahoo! Finance.

[online] Available at: http://finance.yahoo.com/q/bs?s=NDLS+Balance+Sheet&annual

[Accessed 25 Aug. 2014].

Finance.yahoo.com, (2014). NFLX Balance Sheet | Netflix, Inc. Stock - Yahoo! Finance. [online]

Available at: http://finance.yahoo.com/q/bs?s=NFLX+Balance+Sheet&annual [Accessed 25

Aug. 2014].

Insider Monkey, (2014). Oracle Corporation (ORCL), General Motors Company (GM), Intel

Corporation (INTC): Harris Associates Most Valuable Holdings - Insider Monkey. [online]

Available at: http://www.insidermonkey.com/blog/oracle-corporation-orcl-general-

motors-company-gm-intel-corporation-intc-harris-associates-most-valuable-holdings-

325650/ [Accessed 31 Aug. 2014].

Marketwatch.com, (2014). Weibo Reports Second Quarter 2014 Financial Results -

MarketWatch. [online] Available at: http://www.marketwatch.com/story/weibo-reports-

second-quarter-2014-financial-results-2014-08-14?page=1 [Accessed 31 Aug. 2014


McMahon, T. (2014). Monthly Inflation Rate from 1913 to Present | InflationData.com. [online]

Inflationdata.com. Available at:

http://inflationdata.com/Inflation/Inflation_Rate/Monthly_Inflation.aspx [Accessed 19

Aug. 2014].

OECD.StatExtracts, (2014). Monthly Monetary and Financial Statistic (MEI): Interest.

Oleinic, D. (2014). Court Finds Oracle Corporation (NYSE:ORCL)s Intellectual Property Rights

Infringed By Rimini. [online] Wall Street PR. Available at: http://wallstreetpr.com/court-

finds-oracle-corporation-nyseorcls-intellectual-property-rights-infringed-by-rimini-28443


Reuters, (2014). Oracle loses bid to restore $1.3 billion SAP verdict, could get new trial. [online]

Available at: http://www.reuters.com/article/2014/08/29/us-oracle-sap-lawsuit-

idUSKBN0GT1SM20140829 [Accessed 31 Aug. 2014].

Riskprofiling.com, (2014). Risk Profiling - What is Risk Profiling. [online] Available at:

https://www.riskprofiling.com/riskprofiling/what-is-risk-profiling [Accessed 18 Aug. 2014].

Statista, (2014). United States - monthly inflation rate July 2014 | Statistic. [online] Available at:

http://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/


YCHARTS, (2014). US Monthly Real GDP. [online] Ycharts.com. Available at:

https://ycharts.com/indicators/us_monthly_real_gdp [Accessed 20 Aug. 2014].

bafi 3192 assignment report 2015-a

Documents

risk profiles

possible risk

comparison of portfolio

technical analysis

fundamental analysis

portfolio breakdown

portfolio performance

potential loss risk