0
TABLE OF CONTENTS
I.
TRADING PHILOSOPHY
II.
2
PORTFOLIO CONSTRUCTION
2
1.
Macroeconomic Outlook
2
2.
Stock Analysis
4
a.
NVIDIA (NASDAQ: NVDA)
4
b.
Amazon (NASDAQ: AMZN)
6
c.
Microsoft (NASDAQ: MSFT)
9
d.
Biogen (NASDAQ: BIIB)
11
e.
Xcel Energy (NASDAQ: XEL)
13
3.
Portfolio Allocation
16
4.
CAPM Expected Return
17
RISK IDENTIFICATION
18
1.
Systematic Risk
18
2.
Unsystematic Risk
18
3.
Value at Risk
19
IV.
HEDGING
20
1.
Futures Contract
20
2.
Options Contract
21
TRADING PROCESS REFLECTION
22
1.
Risk Appetite
22
2.
Expected Return vs Actual Return
23
3.
Net Portfolio Return using Option
24
4.
Net Portfolio Return using Hedge
24
5.
Hedging Comparison
24
VI.
AI SUGGESTION
25
VII.
REFERENCE
27
VIII.
APPENDIX
30
III.
V.
Abbreviations:
MACD: Moving Average Convergence Divergence
PE: Price-to-Earnings Ratio
PB: Price-to-Book Ratio
ROE: Return on Equity
RSI: Relative Strength Index
1
I.
TRADING PHILOSOPHY
Being a risk-seeking investor aiming to maximise short-term returns, I possessed a portfolio
that included both growth and value stocks to capture growth at a reasonable price while
providing a fortress against unexpected downturns. Anticipating easing inflation and possibly
lower interest rates, 60% of my available budget is allocated to the passive portfolio with stocks
in NASDAQ100, while the 40% is for daily active trading to seek more gains or compensate
for any possible losses.
To select suitable stocks, both fundamental and technical approaches are incorporated using a
top-down approach. First, macroeconomic factors affecting the US investment climate are
analysed to determine the portfolio’s risk management strategy. Next, I chose the bestperforming and not-highly-correlated sectors (Technology, Healthcare, E-commerce, and
Utilities), then selected top performers within each sector by analysing the companies’ financial
performance. Sector or company-specific news is also analysed to provide more context of the
firm’s recent performance as investors tend to buy/sell stocks responsively to news (Sharmaet-al.-2021). Regarding technical analysis, I combined MACD and RSI indicators as they react
more quickly to market changes, thereby being ideal for short-term trading strategies. The
portfolio's stock weights are then determined based on the comparison of different financial
ratios (Farinelli-et-al.-2024). Furthermore, I participate in the derivative market by trading
Future and Option contracts to hedge against potential market downturns.
II. PORTFOLIO CONSTRUCTION
1. Macroeconomic Outlook
The current US macroeconomic environment is woven with stubborn inflation, high interest
rates, and lingering effects of geopolitical tensions and supply chain disruptions yet shows
signs of recovery compared to 2023. Although inflation has eased from the 2022 peak thanks
to aggressive monetary tightening, monthly inflation rose moderately by 0.3% in March due to
stubbornly higher costs for housing and utilities. Therefore, the FED has decided to keep the
benchmark rate at 5.25-5.50%, yet analysts expect this figure will gradually ease within 2024
(Schneider 2024). In addition, the ongoing Russian-Ukraine and Gaza tension has worsened
global energy markets and supply chains, thereby constrained production and raising operating
costs for major sectors (Karamti-and-Jeribi-2023).
2
Figure 1. US Inflation and FED Fund Rate (Reuters 2024)
These macroeconomic factors have created a volatile stock market for investors. While rising
interest rates dampened valuations, especially for growth stocks that rely heavily on earnings
potential, pent-up demand and low unemployment could support corporate earnings stock
prices in some sectors (Bjørnland-2009). Major indices S&P500, NASDAQ, and Dows
increased overall by 24.23%, 43.42%, and 13.8% respectively, emphasising a significant
recovery outlook.
Figure 2. Raising Trend of Major US Stock Index - S&P500, NASDAQ100, and Dow Jones
(TradingView n.d)
To maximise earnings and hedge against any market bearish patterns, I will allocate majority
of my passive portfolio to large-cap stocks that outperform major indexes. Historical data
showed that Technology and Consumer Discretionary have outperformed the S&P500 index
(Beck 2024). I also buy lower performance but less volatile stocks in Healthcare and Utilities
sector to diversify my portfolio, with careful evaluation of fundamental and technical
indicators.
3
Figure 3. S&P500 vs US Technology, Consumer Discretionary, Healthcare, and Utilities
Stocks’ Index Value in 2023 (Fidelity 2023)
2. Stock Analysis
a. NVIDIA (NASDAQ: NVDA)
● Fundamental Analysis: Semiconductor Industry
The semiconductor industry is predicted to rebound from contraction, with global sales
reaching $613.10bn in 2024 and expanding by 12.2% CAGR (Statista-n.d). Fueled by
technology advancements, demand for specialised chips to handle complex computations has
soared, with GenAI chips expected to represent half of the semiconductors' value by 2027
(Deloitte 2024).
Figure 4. NVIDIA Stock Outperform SE Semiconductor Index (Mehta and Bajwa 2023)
4
As GPU market’s leader with 87% market share, rebounding demand for chips used will further
enhance NVDA value. Moreover, with a 92% share in AI chips, the AI boom propels NVDA
into Top5 semiconductor in terms of revenue, making its stock perform better than any peers
in the technology sector (WEF 2024). Recently, the company has extended its leading position
by unveiling “superchip” to develop humanoid robotics, which further boost NVDA’s price
(Hern 2024).
Figure 5. Semiconductor Market Share from 2018-2023 (Zandt 2024)
● Fundamental Analysis: Financial Ratio
USDmn
NVIDIA (NVDA)
2024 Q1
2023 Q4
2023 Q3
2023 Q2
Total Revenue
22,103
18,120
13,507
7,192
Gross Margin
75.97%
73.95%
70.05%
64.63%
Net Income
12,286
9,243
6,188
2,043
Diluted ESP
4.93
3.71
2.48
0.82
EPS (ANN)
11.93
Debt to Equity
0.53
0.63
0.8
0.81
ROE
92.81%
70.35%
43.26%
20.88%
112.85
144.48
Industry Median ROE
PE
12.61%
51.53
53.79
Industry Median PE
48.4
PB
49.28
Industry Median PB
7.38
Beta
1.65
Table 1. NVDA Financial Performance and Ratio (NVDA 2023; 2024)
5
NVIDIA has experienced exceptional growth in 2023, with 125% increase in revenue and net
income thanks to the AI boom. This results in a significant and increasing ROE (92.81%) and
EPS ($4.93) that exceeds most competitors. However, a high Beta of 1.65 indicates significant
risk, while a higher PE and PB ratio than the industry average may emphasise overvaluation,
which may lead to a correction. Yet, due to promising prospects, NVIDIA is expected to
continue to grow in the next 2-week.
● Technical Analysis
Figure 6. NVDA Technical Analysis (TradingView n.d)
NVDA is expected to continue its bullish pattern since the beginning of 2024 with the MACD
line about to cross over the signal line from below on 29/04/2024 and rising histogram bars.
Moreover, RSI was around 50, which showed that NVDA was neither over-bought nor oversold and possible for trading.
b. Amazon (NASDAQ: AMZN)
● Fundamental Analysis: E-commerce/Cloud Computing Industry
E-commerce and Cloud Computing will be examined as they represent major proportion in
Amazon's revenue breakdown (Appendix-1). The e-commerce industry reached $5.39tri in
2023 with a healthy growth rate of 11%, fueled by increased smartphone penetration and
demand for convenient shopping post-COVID. With a strong logistics infrastructure and a wide
network of sellers, Amazon has captured nearly 39% of the US market share, translating to a
significant advantage in brand recognition and customer base (300mn).
6
Figure 7. Retail E-commerce Sales in the US from 2019-2025 (eMarketer 2022)
Figure 8. US E-commerce Industry Market Share (Bradley 2023)
Meanwhile, cloud computing is projected to reach $121.7bn by 2025, fueled by the demand
for scalable, flexible, and on-demand computing resources. AWS has grown consistently,
solidifying its position as the leading cloud provider globally with a 32% market share globally.
With these sectors experiencing exceptional growth, the outlook for Amazon is promising for
investors.
7
Figure 9. Cloud Infrastructure Services Market Share (Kinsta n.d)
● Fundamental Analysis: Financial Ratio
USDmn
Amazon (AMZN)
2024 Q1
2023 Q4
2023 Q3
2023 Q2
Total Revenue
143,313
169,961
143,083
134,383
Gross Margin
47.59%
46.98%
46.24%
45.53%
Net Income
10,431
10,624
9,879
6,750
Diluted ESP
3.57
2.09
1.93
1.27
EPS (ANN)
2.95
Debt to Equity
0.27
0.29
0.33
0.37
ROE
19.57%
17.19%
12.32%
8.62%
65.87
102.65
Industry Median ROE
PE
19.84%
59.64
52.39
Industry Median PE
47.73
PB
9,01
Industry Median PB
8.79
Table 2. Amazon Financial Performance and Ratio (Amazon 2023; 2024)
Although Amazon witnessed a slight revenue decline in Q1’2024, gross margin and net income
demonstrate consistent growth, indicating strong profitability. Their EPS has grown steadily
over the last year, with a whopping 308.79% increase to reach $3.57. In addition, Amazon
boasts a healthy balance sheet with a low Debt-to-Equity ratio (0.27) and stable ROE compared
to industry peers. However, higher PE and PB than the industry median may suggest slight
overvaluation. Yet, this factor is outweighed by all positive metrics above, indicating an
increasing prospect for AMZN.
8
● Technical Analysis
Figure 10. AMZN Technical Analysis (TradingView n.d)
Similar to NVDA, AMZN will continue its bullish pattern. MACD was negative on 29/04/2024
but expected to cross over the signal line from below with rising histogram bars, indicating an
increasing trend. Moreover, RSI was around 50, which showed that AMZN was neither overbought nor over-sold and suitable for short-term trading.
c. Microsoft (NASDAQ: MSFT)
● Fundamental Analysis: Software Suite/Cloud Computing Industry
Figure 11. Industrial Software Market and Top 10 Companies (IoT Analysis 2022)
The global software suite market is expected to reach $288bn by 2027, driven by remote work
adoption and the increasing need for collaboration tools. Microsoft holds a dominant position
in the software industry, particularly with its Windows operating system (50% share) and
Office productivity suite (10.4% share) (Schvartman-2023). Beyond its traditional software
dominance, Microsoft has diversified into cloud computing (Azure) and AI (Copilot), creating
new revenue streams and growth opportunities.
9
Microsoft Azure is a close second to AWS regarding market share, boasting impressive revenue
growth of 20% YoY, with over 65% of Fortune 500 companies using Azure’s service (Teng
2024). Meanwhile, through collaboration with OpenAI, the company has developed Copilot to
integrate into its current software, which boosts Microsoft's userbase by 12% and solidifies its
leading position in the industry (Velasquez 2024).
● Fundamental Analysis: Financial Ratio
USDmn
Microsoft (MSFT)
2024 Q1
2023 Q4
2023 Q3
2023 Q2
Total Revenue
61,858
62,020
56,517
56,189
Gross Margin
69.89%
69.75%
69.44%
68.92%
Net Income
21,939
21,870
22,291
20,081
Diluted ESP
2.94
2.93
2.99
2.69
EPS (ANN)
11.59
Debt to Equity
0.91
0.98
1.02
1
ROE
37.54%
38.40%
38.32%
38.20%
30.45
34.93
Industry Median ROE
PE
24.44%
36.43
33.94
Industry Median PE
45.63
PB
10.67
Industry Median PB
11.03
Beta
1.05
Table 3. Microsoft Financial Performance and Ratio (Microsoft 2023; 2024)
Microsoft boasts a history of consistent profitability and earnings growth (10% YoY), with its
healthy EPS reaching $2.94 and much higher-than-average ROE in Q1’2024. Despite high
Debt-to-Equity ratio (which is normal in the technology industry) and high Beta of 1.05, MSFT
currently has a favourable PE and PB ratio (under the industry average) for further price
increase. Overall, MSFT possessed a positive outlook with a price target exceeding the current
price according to Wall Street analysts.
● Technical Analysis
10
Figure 12. Microsoft Technical Analysis (TradingView n.d)
Despite recent tech correction, MSFT still showed an overall increasing trend even after
29/04/2024. Despite having a negative value, the MACD line is about to cross over the signal
line from below and the rising histogram bar implies an overall increasing trend. Moreover,
RSI was below 50, indicating that MSFT was slightly over-sold and will further increase.
d. Biogen (NASDAQ: BIIB)
● Fundamental Analysis: Biotechnology Industry
Due to market correction, the biotech sector experienced challenging lows during the 22-23
period. However, $6.2bn capital raising in equity markets and increasing M&A activity in
January 2024 marked a sharp turnaround, evidenced by ETF rebounding by 40% and several
stocks reaching their high (Adam 2024).
Figure 13. US SPDR S&P Biotech ETF (Megaw 2024)
Biogen, the second-biggest biotechnology company in neurological treatments, has a robust
drug pipeline with over 9000 MS patents (⅕ of the industry) and 35% of MS patients globally
(Alpha-2022). Recently, the company reached $19m in global sales for the newly launched
11
LEQEMBI - a groundbreaking treatment for Alzheimer's, which drove up profitability and
investor confidence on a bright outlook (Volkman 2024).
Figure 14. Neurology Segment Sales and CAGR Forecast ()
● Fundamental Analysis: Financial Ratio
USDmn
Biogen (BIIB)
2024 Q1
2023 Q4
2023 Q3
2023 Q2
Total Revenue
2,290
2,386
2,530
2,456
Gross Margin
77%
74%
73,9%
75.85%
Net Income
393.4
250
-68
592
Diluted ESP
2.7
1.71
-0.47
4.07
EPS (ANN)
7.97
Debt to Equity
0.43
0.47
0.50
0.43
ROE
10.8%
8.08%
10.42%
19.59%
25.55
15.51
Industry Median ROE
PE
11.59%
27.68
26.43
Industry Median PE
30.39
PB
3.12
Industry Median PB
6.14
Table 4. Biogen Financial Performance and Ratio (Biogen 2023; 2024)
Despite the continuous price decline due to market downturn, analysts forecast strong earnings
growth for BIIB in the coming years with newly invented products. Consistently high margins
suggest efficient operations, which translating to profit generation. Meanwhile, BIIB possesses
12
a favourable PE and PB ratio that is lower than industry average, indicating undervaluation and
potential for long-term growth. Overall, BIIB is expected to increase, though not exceptionally
high as other stocks in my portfolio.
● Technical Analysis
Figure 15. BIIB Stock Price (TradingView n.d)
After a continuous decline from 2024 beginning, BIIB is anticipated to gradually recover.
MACD line crossed over signal line on 21/04/2024 with a rising histogram bar, indicating a
bullish pattern but has yet to return to peak. Hence, although RSI was relatively high (61.14)
indicating over-bought for BIIB, I decided to purchase them due to the positive outlook.
e. Xcel Energy (NASDAQ: XEL)
● Fundamental Analysis: Energy Industry
Electricity demand is anticipated to increase by 4.7% YoY over next five years, driven by
population increase, recovering economic activity, and extreme weather causing people to rely
more on heating or cooling systems. Moreover, as most companies including Xcel still rely on
traditional electricity generation sources (coal, oil), geopolitical instability can cause volatility
and disruption to their value chain. Thus, the US is now gradual shifting to renewable energy
sources like solar and wind.
13
Figure 16. US Total Energy Consumption by End-use Sector (EIA 2023)
Although Xcel is not an industry top performer, the company has relatively strong financial
metrics with ambitious renewable energy goals with 80% carbon-free electricity by 2030,
which aligns well with the future shift. Recently, Xcel has invested $10bn into clean energy
technology, which helped the company reduce the impact of the current US heatwave while
achieving 53% carbon-free energy production (Xcel 2023)
Figure 17. Xcel Tangible Carbon Reduction Plans (Alpha-2020)
● Fundamental Analysis: Financial Ratio
USDmn
Xcel Energy (XEL)
2024 Q1
2023 Q4
2023 Q3
2023 Q2
Total Revenue
3,649
3,442
3,662
3,022
Gross Margin
39.43%
38.75%
34.54%
40.07%
Net Income
488
409
656
288
Diluted ESP
0.88
0.74
1.19
0.52
14
EPS (ANN)
3.16
Debt to Equity
1.53
ROE
1.49
1.49
1.51
10.32%
10.28%
10.38%
17.77
19.2
Industry Median ROE
11.15%
PE
16.7
18.09
Industry Median PE
17.48
PB
1.65
Industry Median PB
1.7
Beta
0.39
Table 5. Xcel Energy Financial Performance and Ratio (Xcel 2023; 2024)
Despite the recent energy price decline, XEL still boasts relatively healthy financial metrics,
with revenue and net income increased by 8% in the last quarter. Besides an increasing EPS,
Xcel is a reliable dividend-paying company, offering a reliable income stream for investors
(BusinessWire-2024). Although high debt-to-equity is not a major consideration for this
industry in the short-term, a lower PE and PB than the industry average suggest slight
undervaluation, presenting a buying opportunity with low risk (0.39 Beta). Overall, growth is
expected for XEL, but may not be exceptionally strong.
● Technical Analysis
Figure 18. XEL Stock Price (TradingView n.d)
After a significant decline in February, XEL shows signs of recovery by continuously breaking
through the resistance level with the MACD line staying above signal line from mid-March. In
addition, around 50-RSI also indicates that XEL was neither over-bought nor over-sold and
therefore suitable for 2-week trading.
15
3. Portfolio Allocation
a. Passive vs Active Portfolio
Figure 19. Passive vs Active Portfolio Allocation
As a risk-seeking investor aiming to maximise profits with low efforts, I allocate 60% of my
available budget for a passive portfolio, leaving 40% for active trading to seek more gains or
compensate for any possible losses.
b. Passive Portfolio
As both 5 stocks show promising fundamental outlooks, portfolio allocation will be decided
mostly based on Technical Analysis and Financial Ratios as they are more suitable for this
short-term (2-week) trading.
Figure 20. Passive Portfolio Allocation
As NVDA and MSFT have favourable PE-PB ratios and strong technical indicators, they form
majority of my portfolio (29.1% and 27.2%). AMZN holds a smaller portion (19.8%) as they
haven’t released Q1’2024 results at the time of buying, giving me uncertainties regarding price
movement. Although TA indicates upward trends for Biogen and Xcel, less favourable PE, PB,
and ROE show sideways movement with limited profit potential than others. Thus, BIIB and
XEL account for smaller proportion - 14.7% and 9.3% respectively.
16
4. CAPM Expected Return
CAPM estimates my portfolio’s expected return based on the perceived systematic risk, which
is relatively high at 19.95%. While it provides a decent benchmark return with a simple
calculation, CAPM made unrealistic assumptions (perfectly efficient markets with rational
investors) and subjective estimation for not including company performance (Markowski2020).
CAPM: R % = [R f + (R m − R f ) × β]
Factor
Data
Methodology
Total Initial Portfolio
$590,693
Risk-free Rate (𝑅𝑅𝑓𝑓 )
2.28%
Calculated based on US Treasury 10-year
securities annual yield in last 5 years
Expected Market
Return (𝑅𝑅𝑚𝑚 )
18.2%
Calculated based on NASDAQ average
annualised returns in last 5 years
1.11
Calculation in Table 8
Portfolio Beta (𝛽𝛽 )
Expected Annual RoR
(%)
Expected Annual
Return Value ($)
R 365(%) = 2.28 + (18.2 − 2.28) × 1.11 = 19.95%
R 365($) = 590,693 × 19.95% = 117,843.25
Table 5. Portfolio Annual Return Calculation using CAPM
However, as the trading game only lasts for 12 days, the return will be recalculated as below:
Return after x days = (Daily Return + 1)x − 1
Expected 12-day RoR
(%)
Expected 12-day
Return Value ($)
R 365 = 19.95% => R1 = 0.00837%
R12(%) = (R1 + 1)12 − 1 = 1.1%
R12($) = 590,693 × 1.1% = $6,497.6
Table 6. Portfolio Annual Return Calculation using CAPM
Year
US 10Y Treasury Annual Yield
NASDAQ 100 Annual Return
2019
2.14%
31.66%
2020
0.89%
24.93%
2021
1.45%
26.86%
2022
2.95%
-29.39%
2023
3.96%
37.12%
17
Average
2.28%
18.24%
Table 7. US Treasury 10-year Securities Annual Yield and NASDAQ100 Annual Return for
the last 5 years (FRED 2024; Curvo 2024)
n
� Beta = BetaStock × Stock Weight
Ticker
i=1
NVDA
MSFT
AMZN
BIIB
XEL
Beta
1.6543
1.0526
1.0651
0.6647
0.3974
Stock Weight
29.1%
27.2%
19.8%
14.7%
9.3%
Portfolio Beta
1.11
Table 8. Portfolio Beta Self-calculation
III. RISK IDENTIFICATION
1. Systematic Risk
Systemic risk can negatively affect an entire market due to external factors and cannot be
controlled by a company/individual (Campbell-et-al.-2010). Firstly, core CPI remaining above
the 2% target rate and high IR can dampen economic activity and hurt stock prices, especially
growth stocks like Amazon and Nvidia (Jareno-2016). Rising energy prices can increase
operational costs and squeeze profit margins for companies like Amazon (delivery costs) and
Xcel Energy (fuel costs for electricity generation). Meanwhile, cyberattack on any of these
companies will disrupt operations, damage their reputation and lead to financial losses.
2. Unsystematic Risk
Unsystematic risk refers to company- or industry-specific uncertainties inherent in each
investment (Mazumdar-et-al.-2020).
Company
Unsystematic Risk
NVIDIA
As NVIDIA relies heavily on GPUs for gaming and data centre (80%
revenue share), any slow-down in these markets can lower demand and
increase inventory costs for chip storage.
Lingering effects of pandemic and geopolitical tensions contributed to
semiconductor disruptions and increasing material costs, which can
impact NVIDIA's ability fulfilment and profitability (BCG 2023)
Microsoft
As software sector is vulnerable to cyberattacks, data breaches in key
products like Windows or Azure could damage Microsoft’s reputation
and cause stock prices to fall.
If Microsoft fails to adapt to new technologies (GenAI) or business
models (open-source software), it could be left behind by competitors.
18
Amazon
Despite e-commerce dominance, consumer preferences and disruptive
competitors are constantly evolving, thus failing to adapt could hurt
Amazon's share.
Amazon has faced criticism over its labour practices, including worker
treatment and unionization efforts, which could affect its reputation and
operational efficiency (Palme-2024).
Biogen
New drug development is a complex and expensive process. Failing
clinical trials or regulatory hurdles could prevent Biogen’s medicines
from reaching the market, impacting revenue and stock price.
Biotech companies rely heavily on patents and IP to protect their
innovations, hence any loss or dispute can be devastating.
Xcel Energy
Extreme weather can significantly impact energy demand, which could
lead to outages and customer dissatisfaction given no emergency plan for
Xcel.
Upgrading infrastructure and transitioning to renewable energy sources
can impose significant costs and disrupt Xcel's traditional business given
their slow adaptation.
Unsystematic risks can be mitigated by a properly diversified portfolio, which is evaluated
using a correlation matrix of stocks’ daily returns. Except for NVDA-MSFT and MSFT-AMZN
having high correlations of 0.695 and 0.685, my portfolio includes stocks that are not highly
correlated with remained correlations lower than 0.6. This indicates that given a stock’s price
fluctuation, others will react but not too much.
NVDA
MSFT
AMZN
BIIB
NVDA
1
MSFT
0.69513415
1
AMZN
0.59124669
0.68512195
1
BIIB
0.24216722
0.29703028
0.23961449
1
XEL
0.20069877
0.39538032
0.20940163
0.21211777
XEL
1
Table 8. Passive Portfolio Stock Correlation Matrix
3. Value at Risk
Position
$590,693
Mean Portfolio Return
0.0014
Standard Deviation Return
0.0191
One-day 99% VAR Return (%)
-4.32%
One-day 99% VAR Value ($)
-$25,452.86
Table 9. One-day 99% VAR Return Calculation
19
Figure 21. One-day 99% VAR Return Probability Chart
Value-at-Risk (VaR) quantifies the extent of possible financial losses to my portfolio over a
specific time frame. (CFI n.d). Using daily return of 5 stocks from 01/01/2019-29/04/2024, the
maximum loss is estimated at -4.32% or -$25,452.86 with 99% confidence interval. Thanks to
my diversification strategy, this figure is significantly lower than the sum of VAR for each
stock (-27.31% or -$161,326.678).
Each Stock VAR
NVDA
MSFT
AMZN
BIIB
XEL
-7.31%
-4.27%
-5.00%
-7.12%
-3.61%
Sum of Each VAR
-27.31%
Portfolio VAR
-4.32%
Value
-$161,326.678
-$25,452.86
Table 10. Portfolio VAR Compared to the Sum of Each Stock VAR
IV.
HEDGING
1. Futures Contract
Future contracts allow security trading at a predetermined price, which helps prevent losses
from unfavourable price changes (Do-and-Faff-2004). As expectation for a recovery market, I
decided to buy E-Mini NASDAQ100 Future contract. The hedge ratio of the initial portfolio is
calculated with the price on 21/08/2023 as below:
Passive Portfolio Hedge Ratio Calculation
H = Beta ×
Passive Portfolio Value
590,693
= 1.11 ×
= 1.83
Future Contract Price × Value of 1 Future Unit
17,873.75 × 20
20
Over-hedging for volatile sectors like Technology represents a significant risk. Thus, I decided
to under-hedge by buying 1 Future contract on 30/04/2024 and selling it on 10/05/2024 to
close the position.
Figure 22. E-Mini Nasdaq 100 Index Future Contract on 30/04 and 10/05 (MarketWatch n.d)
Future Value on 30/04/2024
Future Value on 10/05/2024
Future Profits
FV30/04 = 1 × 20 × $17,873.75 = $357,475
FV10/05 = 1 × 20 × $18,222.75 = $364,455
Profit = $364,455 − $357,475 = $6,980
By under-hedging, I gained an additional $6,980 more from the Future market. This, combined
with stock market return of $15,454.95 (Details in part V.2), elevated total profits to $24,228.
Thus, under-hedging with future contracts is beneficial for my portfolio.
2. Options Contract
Options contracts are agreements to trade securities at a set price, known as the strike price,
before or at the expiration date (Anthony-2003). Given NVDA makes up 29% of my portfolio
and has positive financials and technical indicators in next 2-week, I purchased 2 NVDA call
option contracts with a $880 strike price, close to the share purchase price on 30/04/2024, at a
$19.90 premium. As expected, the options were exercised as the spot price on 05/09/2023 was
lower than the strike price ($893.93).
21
Figure 23. NVDA Call Options Contract as of 30/04/2024 (MarketWatch n.d)
Call Premium on
30/04/2024
Total Value Strike on
10/05/2024
Options Profit
Call Premium30/04 = 2 × $19.9 = $39.8
Total Value10/05 = 2 × 100 × $880 = $176,000
Profit = $893.93 × 100 × 2 − $176,000 − $39.8
= $2,746.2
By exercising the option, I gained $2,746.2 more, elevating total profits to 11,033$. Thus, the
call contracts were beneficial as NVDA increased.
V.
TRADING PROCESS REFLECTION
1. Risk Appetite
As a risk-seeking investor, my portfolio comprises mostly technology stocks (3 out of 5),
resulting in a high Beta of 1.11. These stocks are chosen based on fundamental and technical
analysis for short-term profit potential. In my active portfolio, I diversified by including stocks
from other sectors like AXON-(Military), MDLZ-(FMCG), TSLA-(Automobiles), etc. while
testing various technical analysis tools. Although my portfolio still generated positive returns
after 12 days (+0.37%), I incurred major losses in the active portfolio (-1.88%), which offsets
the passive portfolio’s return (+2.62%), indicating ineffective active trading strategies.
My risk attitude slightly changed during the trading section. As I invested in non-cycle stocks
such as MDLZ, ON, and HWM, for which I believe I will receive capital gains but low, I was
induced to be more risk-averse despite a huge weight on risky stocks. Moreover, although I
have good sentiments about the NVDA business model, I can fall into the FOMO effect with
over-hedging this stock, which may lead to severe lost given reverse stock price.
22
Figure 24. Summary of Stock Trading Performance after 12 Days
2. Expected Return vs Actual Return
Overall, both 5 stocks in my initial portfolio generated positive returns, with actual figures
outperforming CAPM's expected returns.
Actual
Expected (CAPM)
Profit/Loss ($)
$15,454.95
$6,497.6
Return (%)
2.62%
1.1%
Table 11. Actual and Expected Profit/Loss Comparison
Symbol
Buying Price
Selling Price
Value Gain/Loss
Value Gain/Loss %
AMZN
$180.83
$187.11
$4,086.23
3.48%
BIIB
$216.62
$222.42
$2,320.00
2.68%
MSFT
$400.95
$412.80
$4,739.72
2.96%
NVDA
$875.61
$893.51
$3,579.00
2.04%
XEL
$54.75
$55.48
$730.00
1.33%
$15,454.95
2.62%
Total
Table 12. Summary of Stock Return in Initial Portfolio
This difference highlights the drawback of CAPM in determining portfolio return. CAPM
overlooks unexpected events or company-specific factors affecting market sentiment e.g., the
23
news on Q1’s earnings boosted AMZN's value by 10% intraday. Moreover, Beta and risk-free
rates were calculated based on historical data, which can be influenced by future systematic
risk or macroeconomic factors. The US 10-year treasury rate, for instance, increased from
1.63% in 01/2022 to 4.25% in 09/2023.
3. Net Portfolio Return using Option
Spot Price
Strike Price
30/04/2024
$175,122
$176,000
10/05/2024
$178,702
$39.8
Not exercise
Profit/Loss
$3,580
Total Profit/Loss
Exercise
$2,746.2
$6326.2
Table 13. Summary of Profit/Loss using Option
Thanks to Call Options, I gained $2,746.2 more, elevating total profits earned on NVDA to
$6326.2. Thus, the Call Options were beneficial for my portfolio.
4. Net Portfolio Return using Hedge
Stock Market
Future Contract
Call Option Contract
30/04/2024
$590,693
$714,950
$176,039.8
10/05/2024
$606,147.95
$728,910
$178,786
Profit/Loss
$15,454.95
$6,980
$2,746.2
Profit/Loss (with Hedge)
$25,181.15
Difference between
Hedge and non-Hedge
$9,726.2
Net Return (with Hedge)
4.26%
Table 14. Summary of Profit/Loss using Hedging
By under-hedging and using call option, my portfolio generated $9,726.2 more, elevating net
profits to $25,181.15. Hence, hedging is beneficial for my portfolio.
5. Hedging Comparison
In summary, Future and Call Option doubled my return to 4.26%. Although hedging activities
by derivatives instruments alleviate the risk of loss for asset classes, I under-hedge, which
prevents me from meeting losses from over-hedging, while my sentiment on NVDA’s position
24
is biased by fear of a bubble in AI stocks. E-Mini Nasdaq 100 performed as expected, boosting
profits by $10,974. With Call Option on NVDA, which had an expected value increase and a
reasonable premium of $35 per contract, portfolio profits increased by 6,662.
When choosing derivative contracts for hedging, I would prefer using Future contracts.
Options might be more effective for individual holding by offering targeted protection,
regardless of the market trajectory (Pandian-2015). Yet, as my portfolio comprises stocks from
highly volatile NASDAQ100, Future is more cost-effective in protecting against a general
market decline while providing leverage (small investment can control much-magnified gains),
given careful monitoring for larger losses.
VI.
AI SUGGESTION
I use ToggleAI to provide insights into stocks with bullish momentum (Appendix-1), given
that it could analyse large datasets and react to market changes quicker. Based on
recommendations, I invested in PayPal (PYPL); however, suffered from $750 loss since the
price fluctuated.
Figure 25. Toggle AI Recommendation on PYPL (Toggle n.d)
25
USDmn
PayPal (PYPL)
2024 Q1
2023 Q4
2023 Q3
2023 Q2
Total Revenue
7,699
8,030
7,411
7,253
Gross Margin
44.95%
45.75%
45.42%
45.94%
Net Income
888
1,402
1,020
1,029
Diluted ESP
0.83
1.29
0.93
0.92
EPS (ANN)
3.84
Debt to Equity
0.47
0.46
0.539
0.536
ROE
21.40%
21.15%
18.94%
18.94%
17.4
18.64
Industry Median ROE
PE
23.19%
18.64
15.99
Industry Median PE
25.91
PB
3.18
Industry Median PB
7.66
Table 15. PayPal Financial Performance and Ratio (Paypal 2023; 2024)
Generally, Toggle’s suggestion was based on technical analysis, which is suitable for shortterm trading. However, fundamental analysis and financial ratios will provide better prediction
(Smith-2024). Despite Toggle's positive perspective on PYPL, PYPL’s PE and PB ratios are
notably lower than industry median although being the industry leader, indicating significant
undervaluation. Thus, PYPL is more suitable for long-term holding as it takes time for its price
to reach its intrinsic value, thus remaining sideways trend at present.
26
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VIII.
APPENDIX
Appendix 1. Toggle AI Criteria
30