Course ID

Campus
Lecturer
Student
Student ID
Date
Word Count 3299 (excluding graphs, tables, references)

1
Contents
1. Overview....................................................................................................................4
2. Portfolio Construction................................................................................................5
a) Macroeconomic Condition.......................................................................................5
b) Fundamental Analysis............................................................................................... 7
J.P.Morgan (NYSE: JPM)..........................................................................................7
Bank of America (NYSE: BAC)..................................................................................9
Salesforce (NYSE: CRM)..........................................................................................11
c) Expected return using CAPM................................................................................12
3. Risk Identification....................................................................................................14
a) Systematic risk......................................................................................................14
b) Unsystematic risk..................................................................................................17
c) Unsystematic risk diversification...........................................................................18
d) VaR...................................................................................................................... 19
4. Hedging....................................................................................................................20
a) Futures................................................................................................................. 20
b) Options................................................................................................................. 21
5. Reflection.................................................................................................................22
a) Risk appetite.........................................................................................................22
b) CAPM comparison................................................................................................23
c) Hedging calculation..................................................................................................24
d) Hedging evaluation..................................................................................................27
e) AI evaluation........................................................................................................... 28
References...................................................................................................................... 31
Appendices..................................................................................................................... 40

2
 Abbreviation
D/E - Debt-to-equity ratio
PCE - Personal Consumption Expenditures Price Index
CPI - Consumer Price Index
YTD - Year to Date
DCF - Discounted Cash Flow

3
 1. Overview
Before choosing the stocks, a planning outline process was undertaken to examine the risk
tolerance and investment objectives throughout the trading period. Given a 12-days trading time
horizon (excluding weekends), my goal is to capture maximum returns with the least exposure to
systematic and unsystematic risks with an intention of outperforming the short-term market
performance. A top-down approach is utilized to determine the asset allocation decisions,
starting by examining the comprehensive US economic conditions and selecting sectors that
result in most sustainable and high-potential foreseeing growth. Corporations with relatively high
market capitalization and favorable financial health are then chosen within the industries. The
valuation metrics based on fundamentals such as P/E and EV/EBITDA are considered to
determine stock’s intrinsic value in comparison to its market price. Moreover, the firm’s past
year financial performance indicators of Net Profit Margin, EPS, and D/E ratio also reflect its
future financial health.

My approach primarily follows a core-satellite investment strategy where the core portfolio
makes up 90% of the overall portfolio while allocating only a minority to active management.
Besides, to outperform the market, most chosen stocks will have higher volatility than the market
with higher expected returns; however, this can cause significant losses given the current
economic downturns. The portfolio contains a mixture of value and growth stocks. As value
stocks tend to surpass growth stocks during economic headwinds, my strategy will focus on
stocks that are fundamentally undervalued and traded at discount prices, which will likely
generate short-term superior returns (Bell 2020). However, some growth companies that have
promising long-term potential compared to their peers are also considered. The active portfolio is
managed according to daily market fluctuations, news, and investment trends. Besides, futures
hedging, and option contracts are used to mitigate future losses.

4
 2. Portfolio Construction

a) Macroeconomic Condition
Since the inflation rate peaked at 9.1% in June 2022, the Fed’s excessive effort to steadily cool
down the inflationary pressures by raising the interest rate of more than 400 basis points to a
target range of 5.25%-5.5% (Cox 2023). The aggressive rate-rising has slowed the inflation hike
process, decreasing CPI to 3.2% in July 2023 (Duggan 2023). Besides, the Ukraine-Russia
tension began to ease, dropping energy and gas prices 26.5% over the last year, primarily
contributing to the inflation decline (Aratani 2023). Despite the strict tightening monetary policy,
the core PCE is still well above 2% target rate due to robust demand and slow healing of supply
chains. Consequently, experts pose concerns over the possibility of Fed’s last interest rate,
causing uncertainty in the equity market (Mutikani 2023).

Figure 1. 12-month Consumer Price Index (CPI) percentage change from 2003 to present (%)
(U.S. Bureau of Labor Statistics n.d.)

5
 Figure 2. S&P 500 Index Price Return from September 2022 to present (%) (SeekingAlpha
2023)

The US stock market has made a substantial comeback from the bearish outlook in 2022, yet
analysts forecast a challenging headwind for equities during the second half of 2023. The S&P
500 Index has rebounded 19% from the plummet last year, gaining much of its losing position
(Figure 2). However, the Index reported a -5% YTD change where most S&P companies
experienced negative earnings in the second quarter (Davidson 2023). Interest hikes also lead to
an attractiveness in the bond market as investors flock to convertible bonds, surging 26% in
bonds volume in Q1 2023 (Cuillerier et al. 2023). Consequently, the equity market faces
substantial liquidity risk and price volatility.

However, experts are optimistic for the securities market next year, estimating a forward S&P
500 P/E ratio of 18.9, which is higher than its 10-average returns (Duggan and Powell 2023).
The short-run bull-market optimism shed brighter returns on a year-to-date basis for key
industries (Figure 3), where most of them tend to align with economic fluctuations. Therefore, to
outperform the market, my portfolio is constructed with aggressive stocks of high-volatile
cyclical industries such as Consumer Discretionary, Technology, and Financial Services.

6
 Figure 3. U.S. Sector Performance in 2023 (SeekingAlpha 2023)

b) Fundamental Analysis

J.P.Morgan (NYSE: JPM)

JPM 2021 2022 2023 Industry/Peer

US Banks

Valuation multiples

P/E 10.6 10.96 9.25 8.7

EV/EBITDA 4.20 7.17 9.49 N/A

Financial Performance

D/E 1.87 1.86 2.36 4.4

ROE (%) 16.20 12.50 15.40 11.35

Net Margin (%) 37.79 25.51 34.06 30.31

EPS ($) 3.12 4.1 4.37 3.31

7
 Table 1. Valuation metrics of JPM (YahooFinance 2023) (SimplyWallSt 2023)

After a gloomy market in 2022, JPM witnessed a slight recovery in most of its key indicators.
The ROE reached its peak in 2021 at 16.20% followed by a decline in the subsequent year but
solidly regained in the second half of 2023. Even though JPM’s shareholders’ equity return
exceeds the average national banking industry (Table 1), experts criticize a better performance
given its leading position in the market (Zacks 2023). The D/E ratio has grown significantly in
2023 due to the recent acquisition of First Republic, enhancing capital risk status (Nishant and
Anand 2023). Even though JPM’s P/E is higher than the industry’s, it falls below the estimated
fair value, indicating an undervalued position. Moreover, the firm’s current price is evaluated for
trading at a discount with a 43% undervalued price (Figure 4). Overall, JPM is an appealing
value stock.

Figure 4. Fair valuation of JPM using DCF model (SimplyWallSt 2023)

Bank of America (NYSE: BAC)

BAC 2021 2022 2023 Industry/Peer
US Banks

8
 Valuation multiples

P/E 11.92 10.21 8.15 8.7

EV/EBITDA 7.09 7.87 5.19 N/A

Financial Performance

D/E 1.84 1.82 2.36 4.4

ROE (%) 11.20 9.60 10.20 11.35

Net Margin (%) 31.53 22.61 29.28 30.31

EPS ($) 0.82 0.85 0.88 3.31

Table 2. Valuation metrics of BAC (YahooFinance 2023) (SimplyWallSt 2023)

The BAC’s net profit margin was severely hindered during last year’s strict financial condition.
Nevertheless, BAC obtained promising prospects when its earnings grew by 6.3% in recent
times. BAC’s shares maintain a stable price movement with weekly volatility of 3%, preserving
a lower fluctuation than the average banking industry (Figure 5). In addition, BAC promised to
increase the dividend payout ratio by 9% next year, indicating an optimistic financial standing
(Reuters 2023). The firm’s current P/E ratio is lower than the average industry value, suggesting
that the company is undervalued. Experts also estimate the trading price is discounted at 42.9%
to its intrinsic value (Figure 6). Therefore, BAC is an undervalued stock with high-potential
growth.

9
 Figure 5. Price volatility estimation of BAC (SimplyWallSt 2023)

Figure 6. Fair valuation of BAC using DCF model (SimplyWallSt 2023)

Salesforce (NYSE: CRM)

CRM 2021 2022 2023 Industry/Peer
Technology

10
 Valuation multiples

P/E 158.69 807.55 138.6 64.4

EV/EBITDA 48.15 38.14 34.01 23.95

Financial Performance

D/E 0.24 0.24 0.22 0.36

ROE (%) 2.70 0.40 2.71 1.90

Net Margin (%) 6.96 0.92 4.77 6.90

EPS ($) 1.80 0.26 2.05 4.38

Table 3. Valuation metrics of CRM (YahooFinance 2023) (SimplyWallSt 2023)

The net profit margin grew significantly after a slump last year at 4.77%, yet CRM still merely
keeps up with its peers in terms of earnings profit. Nevertheless, recent news of the firm's CEO
announcing AI enhancements in the customer services have skyrocketed CRM’s stock price by
6%, surpassing Wall Street’s expectation (Novet 2023). Being in a robust-volatile industry,
CRM’s earnings were reported to grow by 194.4% in recent years, with a solid forecast of
32.29% rise in upcoming quarters (SimplyWallSt 2023). Consequently, investors raised high
hopes for the firm's future financial health. Experts estimated a 36.2% undervalued of current
price (Figure 7), reckoning short-term buying signals. Overall, CRM indicates an aggressive
value stock with high-potential growth.

11
 Figure 7. Fair valuation of CRM using DCF model (SimplyWallSt 2023)

c) Expected return using CAPM

Figure 8. Initial Portfolio (Trading recorded on 21st August 2023)

Figure 9. Fama-French 3 Factors (French 2023)

12
 Risk free rate (3-month Treasury Bills) (%) 5.30

Portfolio Beta 0.913

Risk Premium (3-month returns) 10.34

Expected 3-month return rate (%) 14.74

12-day adjusted return rate (%) 0.702

12-day expected return amount ($) 6,275.92

Total 12-day expected return ($) 900,282.27

Table 4. Expected return of initial portfolio using CAPM model (FRED 2023)

The CAPM expected portfolio return model is calculated as:1

E(R p)=R f + β p × [ E (Rm )−Rf ]
Given the 12-day trading period, the risk-free rate of 3-month Treasury Bills is chosen as the
shortest non-default maturity security to fit the time horizon. The risk premium is taken from the
Fama-French 3-factor data library, where it measures the expected market return of the last 3
months and subtract the risk-free rate. Next, the portfolio beta is the sum of all products of each
stock’s weights and its matched beta. Then, the 12-day expected return is adjusted from the 3-
month return rate on a 252-effective-trading-day basis.2 Therefore, the 12-day return gain would
approximately be $6,275.92, which is equivalent to $900,282.27 total balance.

1 Where E(Rp) = expected portfolio return; Rf = Risk-free rate; Bp = Portfolio beta; E(Rm) = Expected market
return; E(Rm)-Rf = Risk premium
2 Calculation: 12-day E(Rp) = 3-month E(Rp) x 12 / 252 = 14.74 x 12 / 252 = 0.702%

13
 3. Risk Identification

a) Systematic risk

Tickers Stock Beta Weighted Beta

JPM 1.09 0.229

BAC 1.21 0.219

WMT 0.49 0.103

JNJ 0.52 0.096

CRM 1.25 0.265

Portfolio Beta 0.913

Table 5. Initial Portfolio Betas

The portfolio beta indicates the sensitivity of the systematic risk, which measures the volatility of
holding stocks to the market (Kasser 2020). My portfolio beta falls to 0.913, designating a
somewhat alignment with the market’s fluctuations. Consequently, each 1% market gain will
cause 0.913% profit of my overall stocks, and vice versa. The relatively high beta can be
explained by most chosen firms with higher-than-market volatility, which also accounts for my
risk-seeking investment strategy.

Exchange rate risk

Due to an aggressive Fed’s interest rate hike, the US Dollar enjoyed its appreciated position
against a basket of major currencies (Cooban 2023). Since mid-July, the spot DXY has risen 5%
and the Dollar Index Futures USDX has gone up by 2%, obtaining its eighth-straight week rally
over the market (Figure 10 and Figure 11). Higher interest rate surges USD demand as a safe-
haven during ongoing economic instability; especially recent failures of the banking system
encouraged risk-averse investors to seek security in the dollar (Katzeff 2023). The strengthened
greenbacks have damped the international profitability of multinational corporations, where 40%
of S&P 500’s earnings derived from overseas (Robertson 2023). Reports show that technology
and material sectors are most vulnerable to foreign exchange exposure. Consequently, Salesforce

14
announced an $800M shave-off from its abroad sales due to exchange fluctuations (Cortina
2023). Therefore, the securities market is forecasted to encounter rapid movement under foreign
exchange risk.

Figure 10. U.S. Dollar Index (DXY) (TradingView 2023)

Figure 11. ICE U.S. Dollar Index (CNBC 2023)

15
 Figure 12. Exchange rate of basket of currencies (BLS 2023)

Interest rate risk

As aforementioned, the tightening monetary policy will likely be continued when the Fed
announces the high possibility of increased interest. The surging rate caused harm to large-cap
companies in terms of increased borrowing costs and ability to service short-term debt
obligations (Glaze 2023). Moreover, high rates disturb future cash flow stability by raising the
investors’ required rate of return, making growth firms more vulnerable to the economic
downturn (Dolan 2023). Accordingly, major firms including Walmart or JPM filed job
reductions due to climbing operating expenses (Valinsky 2023). Additionally, as
aforementioned, the current hike has encouraged investors to purchase bonds due to lower
reinvestment risk, causing liquidity risk in the equity market.

b) Unsystematic risk

16
JPM
The recent acquisition of First Republic Bank has brought significant fluctuations to the firm’s
financial health. The M&A caused $173B of loans and $30B securities with $87B of total
deposits and all the mortgage burdens resulted from the failure of FRB (Son 2023). Even though
experts are optimistic about the company’s future obligation fulfillment, there are uncertainties
around the stability of JPM’s credit ratings (Taiano 2023). The latest scandal revolving around
the trafficking human offenses of Jeffrey Epstein brought rumors from the media, causing JPM
$290M to settle the lawsuit (Thaler 2023). Overall, JPM is facing financial, credit rating, and
reputational risks.

BAC
In February 2023, BAC was hit by a data breach that fueled the leaking of more than 500,000
customers' data on and offshore. Countless personal financial accounts were stolen, causing
numerous phishing attacks (Steven 2023). Accordingly, BAC has undergone $34M to resolve the
situation. In addition, BAC was also charged with illegal double charging insufficient fees and
permissionless opening accounts without customer’s acknowledgement (Jones 2023).
Consequently, the CFPB3 has fined BAC $245M in penalties for violating lawful practices
(Prentice 2023). Overall, BAC faces cybersecurity risk that leads to operational risk, and
regulatory risk.

CRM
Experts forecast that Salesforce is falling behind in the AI competition over its largest rivals such
as Google or Oracle. CRM reports more than 60% of its full-time workers lack AI skills to fit
with the company’s ecosystem (Fore 2023). As a result, CRM’s shares have plunged 40% over
the past year with unpromising profits decline (Monica 2023). Recently, Salesforce also
underwent a major data breach due to its malware infiltration, leaking 150,000 CRM’s software
users including large banks and healthcare providers (Savitz 2023). Therefore, CRM overlooks
operational and cybersecurity risks.

3 Consumer Financial Protection Bureau

17
 c) Unsystematic risk diversification
The portfolio’s unsystematic risk is diversified by choosing stocks in different industries. Using
historical adjusted closing prices from August 2022 to August 2023, a covariance matrix is
formed to analyze the linear relationship between stocks (Figure 13). Even though the values are
positive, the coefficient is significantly small, indicating a weak movement among securities.
Moreover, the correlation between stocks also falls below 0.4, showing that the stock classes are
merely correlated and not move in tandem with each other. 4 Consequently, the market falls will
not cause the stocks to fall as much. Thus, my portfolio is well-diversified, mitigating
unsystematic risks.

Figure 13. Covariance matrix of stocks in the initial portfolio5

Figure 14. Correlation matrix between stocks in the initial portfolio6

4 The result does not account for the correlation between JPM and BAC as they are in the same banking industry so
they have a very high correlation coefficient (0.81).
5 Data is taken from Yahoo Finance (YahooFinance 2023)
6 Data is taken from Yahoo Finance (YahooFinance 2023)

18
 d) VaR
At a 99% confidence level, the one-day maximum potential loss of my portfolio is $31,416.04
given normal market conditions, accounting for 3.514% of total balance. In other words, there is
1% that my portfolio could lose maximum $31,416.04 over the next trading day if the market
experiences no worst outcomes.

One-day 99% VaR in % -3.514%

One-day 99% VaR in value (USD) $ (31,416.04)

Table 6. One-day 99% VaR of the initial portfolio

As the daily returns rely on historical performance, VaR poses some limitations of predicting the
future’s price movement. Since the data is taken from 2019, there are multiple occurrences of the
market’s ups and downs; thus, it is not fully efficient given the current aggressive contracting
economy. Therefore, other risk management should also be considered.

Figure 15. Histogram of initial portfolio’s daily returns

19
 4. Hedging

a) Futures
To hedge against potential market decline, the E-Mini S&P 500 Future Contract was used, where
it is trading at 4,380.0 with $50-per-contract-size on 21st August (Figure 16).

Figure 16. E-Mini S&P 500 Future Continuous Contract opening price on 21st August 2023
(MarketWatch 2023)7

The hedge ratio is calculated to decide the required contract-size as:

MV p 894,006.35
hp= × β p= ×0.913=3.73 contracts
MV f $ 4380.00 × $ 50
As my portfolio’s beta is close to market volatility, the current economic downturn can cause
significant losses to my portfolio. Thus, shorting futures contracts can hedge against unfavorable
price movements as its value moves in the opposite direction to my initial investments.
Consequently, a gain in stocks will be offset by the losing of futures’ position and vice versa. I
decided to over-hedge with 4 contracts to better preserve my aggressive-risk-seeking-behavior’s
potential losses. Therefore, the futures’ expense is $876,000 (excluding brokerage fees).

Time Portfolio Value Futures Contract Price

21st August Initial Portfolio Value = Short 4 contracts at $4,380.00

7 I was unable to capture the closing price of E-Mini Futures on 21st August, so I took the opening price to measure
the hedging contracts. However, for the rest of the paper, the price will be analyzed upon closing price of each other
day to result in better estimation.

20
 2023 $894,006.35 Futures price = 4* $4380 *$50 = $876,000
(assuming no brokerage fee)

Table 7. Calculation of Futures Contract price on 21st August

b) Options
Given current economic headwinds and CRM’s operational risks, I expect that CRM’s shares
will decline henceforth. Additionally, CRM obtains the highest weights and beta in the portfolio,
indicating greatest volatility risk; thus, a put option is used to hedge against the downside
exposure of CRM. The covered put option is chosen at a strike price of $205 with a premium of
$8.20/contract that expired on 8th September 2023.8

Figure 17. CRM’s put option selection on 21st August 2023 expiring on 8th September 2023
(MarketWatch 2023)

8 1 put option contract = 100 shares

21
Holding 921 CRM’s shares on-hand, I decided to over-hedge with 10 option contracts, with each
contract consisting of 100 shares, to fully cover my stock position. Over-hedging is appropriate
given my high-risk high-return approach to offset significant losses. Overall, the put premium
costs $8,200 (excluding brokerage fees).

Time Equity Market Option Market

21st August Buy 921 CRM’s shares @ Long 10 put option contracts (1 contract
2023 $205.87 market price = 100 shares) @ exercise price of $205
with put premium of $8.20 per contract

Total CRM’s value = $205.87 Total put premium = 10 * 100 * $8.20

*921 = $189,606.27 = $8,200
(assuming no brokerage fee)

Table 8. Calculation of Option put premium on 21st August 2023

5. Reflection

a) Risk appetite
As aforementioned, since my primary objective is to outperform the market with high-risk high-
return value stocks, aggressive risk-seeking behavior was undertaken. This strategy can be
explained by most stocks’ chosen having higher-than-market volatility. Even though the
portfolio’s beta falls below 1, it is very much aligned with the market movement. Additionally,
the strategy also suggests selecting undervalued stocks that have long-term sustainable growth
and historical strong performance during economic downturns. A risk-taking behavior may
magnify substantial losses; thus, over-hedging was appropriate to hedge against great loss.

For my active portfolio, I implemented a strategic asset allocation and a stop loss limit of 10%
below market price for each stock. I also diversified my portfolio by purchasing mutual fund
stocks, small-cap equities, and securities within different industries. Accordingly, my aggressive
risk-taking strategy is consistent throughout while most of the chosen stocks exceed market

22
volatility (Table 9). Besides, the selection was based on updated news and fundamental analysis.
For instance, noticing NVDA’s shares skyrocketed after its new release of the world's strongest
AI chip (Saul 2023), I was FOMO and bought a large chunk of shares. Since the interest hike did
not hit hard, most stocks performed adequately during downturns and were able to generate
profits. Thus, I could maintain my risk appetite with a diversified portfolio to maximize gains.

Table 9. Active portfolio record

b) CAPM comparison
The actual return was 0.408% opposed to CAPM’s 12-day expected return of 0.702%. The lower
outcome can be verified by several reasons. First, the CAPM takes on historical data that is
heavily subjective to past price fluctuations; therefore, CAPM may not be accurate to predict
future movement (Pilbeam 2005). The current economic headwinds pose a high risk that the
market return can be negative at any time, contrary to the smooth-out positive return that is more
suitable for long-term investments. Besides, CAPM fails to consider unsystematic risks while
assuming it is fully diversified (Baldridge 2023). However, my portfolio is not optimal and only
portionally diversifiable. Thus, firm-specific risk can drag stock’s value down, affecting the
overall portfolio return. Additionally, CAPM’s assumption of efficient-priced stock does not
hold realistically due to either stock’s underpriced or overpriced evaluation (Chen 2022).
Consequently, my portfolio is made up of undervalued equities, thus, CAPM may not be precise.
Overall, the actual return can be different from CAPM’s expected return due to its inconsistent
inputs and unrealistic assumptions.

23
 Table 10. Actual return of initial portfolio

c) Hedging calculation
i) Futures
During 12-day trading, my initial portfolio gained $3,649.40. However, as the E-mini Futures
increased to $4,502.50 on September 5th, I experienced a $24,500 loss on shorting futures. Due
to cash settlement of futures, I was only debited for the net position on the settlement date
instead of transferring the whole underlying assets’ value. Overall, the total balance incurred a
$20,850.60 shortage (Table 11).

Figure 18. Closing price of E-mini S&P 500 from 21st August 2023 to 5th September 2023
(MarketWatch 2023)

24
 Table 11. Futures net gain/loss calculation
Since futures enforces mark-to-market on a daily basis, the initial margin needs to be checked
every day for potential margin call. The futures require $12,320/contract of initial margin and
$11,200/contract of maintenance margin (Figure 19). Since I shorted 4 contracts, my account
must uphold $49,280 in the first place to open my position and cannot drop under $44,800.
Consequently, I encountered 2 margin calls on 23rd and 29th August (Table 12).9

Figure 19. Initial and maintenance margin requirements of E-Mini S&P 500 (CME 2023)

Table 12. E-Mini Margin Call summary

9 The margin call net position is not the same as the futures contract loss (Table 11) because on the last day of
trading (5th September), my initial margin account was up $850 higher than the initial margin requirement. This
explains the difference between 2 values. I was in a short position so a gain on futures price equals to a loss in my
initial margin account and vice versa.

25
 ii) Options
On the last day-trading, CRM went up to $219.12/share. The put option offers to sell at
$205/share, lower than the market price. Thus, I did not exercise the option. Since I was charged
with $8,200 put premium, I obtained a net $4,003.25 gain in total.

Table 13. Put option net gain/loss calculation.

d) Hedging evaluation

Table 14. Initial portfolio hedging scenarios.

Figure 25 shows that by utilizing both futures and options, my portfolio experienced the highest
loss in return of -3.249% among the scenarios. The net gain from buy-and-hold of 5 stocks
cannot compensate for the upturn of the market due to aggressive short-term volatility of each
stock, resulting in a net short loss position of $20,850.6. For options, the selling right was not
exercised, causing a net drop of $4,550.6. Overall, both futures and options failed to present the
risk-hedging effect in this situation.

26
However, futures are still a perfect tool to hedge portfolio against market downturn. Given the
forecasted economic headwinds, I was expecting that the market would experience a shock as
Fed’s ongoing interest hike. Nevertheless, I was mistaken since the market realizes positive
outcomes. This is attributable to the leading-indicator characteristic of the stock market as
investors have already acted in advance (Illian 2021). Besides, one limitation of shorting futures
is its unlimited loss due to potential never-ending market gains. Still, futures are sufficient to
eliminate market risk that offset possible price fall.

Options are less risky than futures as it offers a right not an obligation. It is used to hedge against
price fall of risky assets when locked in a predetermined selling price. Put option is most suitable
for CRM as it obtains the highest volatility. Unlike futures, option covers CRM’s unsystematic
risk and allows personal-customized settlement price. Thus, the options are efficient for stock-
specific hedging.

Overall, both hedging tools are preferable as futures reduce the portfolio’s market risk while
options eliminate a specific stock’s price exposure.

e) AI evaluation
During the trading game, I entered transactions of PANW and NVDA based on Toggle AI’s
recommendation on 22nd August (Figure 32 & 33). The AI tool predicted NVDA underwent a
bullish trend for a 14.79% potential upside using technical analysis, the same as PANW with
6.39%. However, 2 days later, both PANW and NVDA dropped 5% in share price, incurring a
$3,328.47 loss. Thus, I encountered a negative experience with AI stock-trading tools.

There are few reasons why investors should not be inclined on AI tools in stock-investing. First,
the forecasted upside is based solely on technical analysis without considering fundamental
aspects. While the technical advice to buy, the stock’s forward P/E surged 32.04x, indicating an
overpriced and a ‘sell’ signal (Figure 35). Besides, Toggle failed to account for the stock’s
unsystematic risk where its prediction did not represent the ongoing news of the company. Next,
the statistics collected in the tool may not be the same as reliable sources like Investing.com,

27
causing potential misevaluation. Finally, AI was ineffective at capturing human’s psychological
biases in realistic trading, posing behavioral risk. However, an advantage of Toggle would be its
quickness in updating news and offers inclusive perspectives for investors.

Figure 20. Toggle AI analysis of PANW on 22nd August 2023 (ToggleAI 2023)

28
Figure 21. Toggle AI analysis of NVDA on 22nd August 2023 (ToggleAI 2023)

Figure 22. NVDA share price on 25th August 2023 (TradingView 2023)

29
 Figure 23. NVDA’s fundamentals on 25th August 2023 (TradingView 2023)

References
Aratani L (2023) US inflation rate down to 3% in June, a two-year low, but prices remain high,
The Guardian, accessed 9 September 2023,
https://www.theguardian.com/business/2023/jul/12/us-inflation-rate-june-2023

Akbari Z (2023) Is Walmart Stock a Buy, Sell, or Fairly Valued After Earnings?, accessed 11
September 2023, https://www.morningstar.com/markets/is-walmart-stock-buy-sell-or-fairly-
valued-after-earnings

Bell M (2020) Does this recession favour growth stocks?, J.P.Morgan, accessed 8 September
2023, https://am.jpmorgan.com/au/en/asset-management/liq/insights/market-insights/market-
updates/on-the-minds-of-investors/does-this-recession-favour-growth-stocks/

Baldridge R (2023) The Capital Asset Pricing Model (CAPM), Forbes, accessed 14 September
2023, https://www.forbes.com/advisor/investing/capm-capital-asset-pricing-model/

30
Chen Y (2022) ‘The Ineffectiveness of Capital Asset Pricing Model and
Its Possible Solutions’, Business and Management Research, 211:105-111.

Cortina (2023) Surging Dollar Threatens $60 Billion Hit to Corporate Revenue, accessed 11
September 2023, https://www.bloomberg.com/news/articles/2022-09-27/strong-us-dollar-
threatens-to-cut-s-p-500-third-quarter-profits#xj4y7vzkg

CME (2023) E-mini S&P 500, CME Group, accessed 15 September 2023,
https://www.cmegroup.com/markets/equities/sp/e-mini-
sandp500.margins.html#span=span&sortField=maintenanceRate&sortAsc=true

Cox J (2023) Fed approves hike that takes interest rates to highest level in more than 22 years,
CNBC, accessed 9 September 2023, https://www.cnbc.com/2023/07/26/fed-meeting-july-
2023-.html

CNBC (2023) ICE U.S. Dollar Index, CNBC, accessed 11 September 2023,
https://www.cnbc.com/quotes/.DXY

Cooban A (2023) The US dollar is king again. Here’s why, CNN, accessed 11 September 2023,
https://edition.cnn.com/2023/09/08/investing/us-dollar-value/index.html

Cuillerier I, Diamond C, Mann L, and So E (2023) US issuers flock to convertible bonds in

choppy market, WhiteCase, accessed 9 September 2023,
https://debtexplorer.whitecase.com/leveraged-finance-commentary/us-issuers-flock-to-
convertible-bonds-in-choppy-market

Constantino A (2023) Johnson & Johnson shares fall after company beats on earnings and
revenue, but lowers pharmaceutical sales guidance, CNBC, accessed 11 September 2023,
https://www.cnbc.com/2023/04/18/johnson-johnson-jnj-earnings-q1-2023.html

31
Davidson P (2023) Fed rate hikes don't just fight inflation. They hurt economy over long-term,
study says, USA Today, accessed 9 September 2023,
https://www.usatoday.com/story/money/2023/08/25/federal-reserve-interest-rate-hikes-
innovation/70673338007/

Dolan M (2023) Column: US rates biting beneath the surface, Reuters, accessed 12 September
2023, https://www.reuters.com/markets/europe/us-rates-biting-beneath-surface-2023-09-08/

Duggan W and Powell F (2023) Stock market forecast for the next six months, USA Today,
accessed 9 September 2023, https://www.usatoday.com/money/blueprint/investing/stock-market-
forecast-next-6-months/

Federal Reserve Bank of St. Louis (FRED) (2023) Real M2 Money Stock, FRED website,
accessed 9 September 2023, https://fred.stlouisfed.org/series/M2REAL

Fore P (2023) Salesforce says over half of desk workers do not have the proper skills to leverage
AI. Here’s how the company is helping people get ahead through online learning, Fortune,
accessed 12 September 2023, https://fortune.com/education/articles/salesforce-trailhead-ai-tech-
training/

French K (2023) Current Research Returns, Dartmouth, accessed 11 September 2023,

https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

FRED (2023) 3-Month Treasury Bill Secondary Market Rate, Discount Basis, FRED, accessed
11 September 2023, https://fred.stlouisfed.org/series/TB3MS

Glaze A (2023) How Rising Interest Rates Can Hurt—Or Help—Businesses, Forbes, accessed 12
September 2023, https://www.forbes.com/sites/forbesfinancecouncil/2023/01/31/how-rising-
interest-rates-can-hurt-or-help-businesses/?sh=28f5cef124f0

32
Howland D (2023) Citing ‘tens of millions of dollars a year’ in losses, Walmart to close 4
Chicago stores, RetailDive, accessed 12 September 2023,
https://www.retaildive.com/news/walmart-closing-four-chicago-stores-tens-millions-losses/
647401/

Illian I (2021) Think The Stock Market Is A Leading Economic Indicator? Think Again, Forbes,
accessed 15 September 2023,
https://www.forbes.com/sites/forbesfinancecouncil/2021/02/25/think-the-stock-market-is-a-
leading-economic-indicator-think-again/?sh=1a3525413136

Kasser, J. E. (2020) Systemic and Systematic Risk Management. 1st ed. Milton: Taylor &
Francis Group.

Katzeff P (2023) Why Is The U.S. Dollar So Strong Right Now?, Forbes, accessed 11 September
2023, https://www.forbes.com/advisor/investing/strong-dollar/

Multikani L (2023) US inflation cooling as consumer prices rise moderately again, Reuters,
accessed 9 September 2023, https://www.reuters.com/markets/us/us-consumer-prices-rise-
moderately-july-weekly-jobless-claims-above-expectations-2023-08-10/#:~:text=Annual
%20consumer%20prices%20have%20come,has%20a%202%25%20inflation%20target.

MarketWatch (2023) E-Mini S&P 500 Future Continuous Contract, MarketWatch, accessed 13
September 2023, https://www.marketwatch.com/investing/future/es00

Mukherjee R (2023) Johnson & Johnson’s set to lose patent on key TB drug in July, The Times
of India, accessed 12 September 2023, https://timesofindia.indiatimes.com/india/johnson-
johnsons-set-to-lose-patent-on-key-tb-drug-in-july/articleshow/98951736.cms?from=mdr

Monica P (2023) What the heck happened to Salesforce?, CNN, accessed 12 September 2023,
https://edition.cnn.com/2022/11/29/investing/salesforce-stock-earnings/index.html

33
Nishant N and Anand N (2023) JPMorgan's profit surges to record after First Republic deal,
Reuters, accessed 10 September 2023, https://www.reuters.com/business/finance/jpmorgan-
second-quarter-profit-rises-higher-interest-income-2023-07-14/

Novet J (2023) Salesforce shares pop on earnings beat and optimistic forecast, CNBC, accessed
11 September 2023, https://www.cnbc.com/2023/08/30/salesforce-shares-pop-on-earnings-beat-
and-optimistic-forecast.html

OECD (2023) Business confidence index (BCI), OECD website, accessed 9 September 2023,
https://data.oecd.org/leadind/business-confidence-index-bci.htm

Rushe D (2023) Fed raises interest rates to 22-year high as it continues to fight inflation, The
Guardian, accessed 9 September 2023, https://www.theguardian.com/business/2023/jul/26/fed-
raises-interest-rates

Pilbeam K (2005) ‘The Capital Asset Pricing Model’, Finance and Financial Markets, 188-
214,doi.org/10.1007/978-1-349-26273-1_8

Prentice C (2023) Bank of America to pay over $250 million over junk fees, other issues,
Reuters, accessed 12 September 2023, https://www.reuters.com/business/finance/us-regulators-
fine-bank-america-over-junk-fees-cfpb-2023-07-11/

Reuters (2023) US FDA approves J&J's blood cancer therapy, Reuters website, accessed 11
September 2023, https://economictimes.indiatimes.com/news/international/business/us-fda-
approves-jjs-blood-cancer-therapy/articleshow/102608379.cms

Reuters (2023) Bank of America increases dividend by 9% after Fed stress test, Reuters website,
accessed 11 September 2023, https://www.reuters.com/markets/us/bank-america-increases-
dividend-by-9-after-fed-stress-test-2023-07-05/

34
Robertson H (2023) Why is the US dollar so strong again?, Reuters, accessed 11 September
2023, https://www.reuters.com/markets/currencies/why-is-us-dollar-so-strong-again-2023-05-18/

Repko M (2023) Walmart raises full-year earnings forecast as grocery, online growth fuel
higher sales, CNBC, accessed 11 September 2023, https://www.cnbc.com/2023/08/17/walmart-
wmt-earnings-q2-2024.html

Statista (2023) Difference between the inflation rate and growth of wages in the United States
from January 2020 to July 2023, Statista website, accessed 9 September 2023,
https://www.statista.com/statistics/1351276/wage-growth-vs-inflation-us/

SeekingAlpha (2023) S&P 500 Index Charting, Seeking Alpha website, accessed 9 September
2023, https://seekingalpha.com/symbol/SPX/charting?
compare=SPX,SP500&interval=1Y&metric=priceReturn

Savitz E (2023) Salesforce Stock Falls Despite Strong Earnings Report, Barron’s, accessed 12
September 2023, https://www.barrons.com/articles/salesforce-earnings-stock-price-91747150

Son H (2023) JPMorgan Chase takes over First Republic after biggest U.S. bank failure since
2008, CNBC, accessed 12 September 2023, https://www.cnbc.com/2023/05/01/first-republic-
bank-failure.html

Steven (2023) Nearly 500,000 Bank of America Customers Hit By Data Breach on Debt
Collector, Sentinel, accessed 12 September 2023,
https://www.idstrong.com/sentinel/bank-of-america-customers-hit-by-breach/

Sperling N (2023) Judge Rejects Johnson & Johnson’s Effort to Limit Talc-Related Suits, The
New York Times, accessed 12 September 2023,
https://www.nytimes.com/2023/07/30/business/johnson-johnson-talc-baby-powder-lawsuit.html

35
Stempel J (2023) Walmart faces second U.S. lawsuit this week over treatment of workers,
Reuters, accessed 12 September 2023, https://www.reuters.com/legal/walmart-faces-second-us-
lawsuit-this-week-over-treatment-workers-2023-03-30/

Saul D (2023) Nvidia Stock Hits All-Time High After 315% Surge—Easily Outpacing Its Peers,
Forbes, accessed 14 September 2023,
https://www.forbes.com/sites/dereksaul/2023/08/22/nvidia-stock-hits-all-time-high-after-315-
surge-easily-outpacing-its-peers/?sh=574a99274b56

SimplyWallSt (2023) JPMorgan Chase, Simply Wall St, accessed 10 September 2023,
https://simplywall.st/stocks/us/banks/nyse-jpm/jpmorgan-chase

SimplyWallSt (2023) Bank of America, Simply Wall St, accessed 10 September 2023,
https://simplywall.st/stocks/us/banks/nyse-bac/bank-of-america

SimplyWallSt (2023) Walmart, Simply Wall St, accessed 11 September 2023,

https://simplywall.st/stocks/us/consumer-retailing/nyse-wmt/walmart

SimplyWallSt (2023) Johnson & Johnson, Simply Wall St, accessed 11 September 2023,
https://simplywall.st/stocks/us/pharmaceuticals-biotech/nyse-jnj/johnson-johnson

SimplyWallSt (2023) Salesforce, Simply Wall St, accessed 11 September 2023,

https://simplywall.st/stocks/us/software/nyse-crm/salesforce

ToggleAI (2023) Nvidia, Toggle AI, accessed 15 September 2023,

https://toggle.ai/analyze/nvda_nasd

ToggleAI (2023) Palo Alto Networks, Toggle AI, accessed 15 September 2023,
https://toggle.ai/analyze/panw_nyse

36
Taiano M (2023) JPMorgan’s Ratings Unaffected by Acquisition of First Republic Assets,
FitchRatings, accessed 12 September 2023,
https://www.fitchratings.com/research/banks/jpmorgans-ratings-unaffected-by-acquisition-of-
first-republic-assets-02-05-2023

Thaler S (2023) JPMorgan to pay $290M to settle lawsuit from Jeffrey Epstein victims, New
York Post, accessed 12 September 2023, https://nypost.com/2023/06/12/jpmorgan-reaches-
settlement-with-epstein-victim-in-lawsuit/

TradingView (2023) U.S. Dollar Index, TradingView, accessed 11 September 2023,

https://www.tradingview.com/symbols/TVC-DXY/

U.S. Bureau of Labor Statistics (n.d.) 12-month percentage change, Consumer Price Index,
selected categories, Bureau of Labor Statistics, accessed 9 September 2023,
https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-
chart.htm

U.S. Bureau of Labor Statistics (BLS) (2023) How currency appreciation can impact prices: the
rise of the U.S. dollar, U.S. Bureau of Labor Statistics, accessed 11 September 2023,
https://www.bls.gov/opub/btn/volume-12/how-currency-appreciation-can-impact-prices-the-rise-
of-the-us-dollar.htm

Valinsky J (2023) Walmart lays off 2,000 warehouse workers, CNN, accessed 12 September
2023, https://edition.cnn.com/2023/04/04/business/walmart-warehouse-layoffs/index.html

Walmart (2023) 10-K Report, Walmart, accessed 12 September 2023,

https://s201.q4cdn.com/262069030/files/doc_financials/2023/ar/Walmart-10K-Reports-
Optimized.pdf

YahooFinance (2023) JPMorgan Chase & Co. (JPM), Yahoo Finance, accessed 10 September
2023, https://finance.yahoo.com/quote/JPM/key-statistics/

37
YahooFinance (2023) Bank of America Corporation (BAC), Yahoo Finance, accessed 10
September 2023, https://finance.yahoo.com/quote/BAC?p=BAC&.tsrc=fin-srch

YahooFinance (2023) Walmart Inc. (WMT), Yahoo Finance, accessed 11 September 2023,
https://finance.yahoo.com/quote/WMT?p=WMT&.tsrc=fin-srch

YahooFinance (2023) Johnson & Johnson (JNJ), Yahoo Finance, accessed 11 September 2023,
https://finance.yahoo.com/quote/JNJ?p=JNJ&.tsrc=fin-srch

YahooFinance (2023) Salesforce, Inc. (CRM), Yahoo Finance, accessed 11 September 2023,
https://finance.yahoo.com/quote/CRM?p=CRM&.tsrc=fin-srch

Zacks (2023) Here's Why JPMorgan (JPM) Stock is a Compelling Buy Right Now, Nasdaq,
accessed 10 September 2023, https://www.nasdaq.com/articles/heres-why-jpmorgan-jpm-stock-
is-a-compelling-buy-right-now#:~:text=Superior%20Return%20on%20Equity%20(ROE,more
%20efficiently%20than%20its%20peers.

38
Appendices

Macroeconomic conditions

The continuing interest rate hike cycle has slowed the US economic growth, with a 0.9% decline
during the first two quarters, and damaged household wealth significantly. The rate rises have
pushed food prices by 3.6% on a year-on-year basis, drove up long-term mortgage rates by 7%,
credit default by 21.8%, and auto loans by 9.1%, hampering consumer spending (Rushe 2023).
Therefore, companies are affected with low sales and damping stock prices. However, a positive
outcome can be seen as the growth of wages has surpassed the inflation rate, signaling a
recovering economy.

Fundamental analysis of WMT and JNJ

Walmart (NYSE: WMT)

WMT 2021 2022 2023 Industry/Peer

Consumer
Discretionary

Valuation multiples

P/E 28.36 33.22 31.4 22.9

EV/EBITDA 13.85 14.38 14.15 18.09

39
 Financial Performance

D/E 0.69 0.77 0.81 1.2

ROE (%) 16.90 15.40 18.70 16.18

Net Margin (%) 1.40 2.36 2.23 1.96

EPS ($) 4.75 4.87 5.19 9.10

Appendix 1. Valuation metrics of WMT (YahooFinance 2023) (SimplyWallSt 2023)

WMT witnessed a profitable outcome in the first two quarters of 2023 where its revenue grew by
7.6% and the net sales rose by 12.9% internationally (Akbari 2023). Thanks to its efficient e-
commerce sales, the firm is forecasted to grow by 9.8% in total earnings, enhancing its leading
brand name (Repko 2023). With higher investment opportunities, WMT’s shareholders’ equity is
able to increase by 3.4% over the past year, exceeding the average in the sector (Appendix 1).
While the firm’s P/E is higher than its peers, the EV/EBITDA multiples indicate a lower value
than the industry median, signaling a fairly value outlook. WMT’s moderate valuation was also
confirmed by expert’s estimation of trading at only 3.4% discount (Appendix 2). Overall, WMT
is a worth-trading growth stock.

Appendix 2. Fair valuation of WMT using DCF model (SimplyWallSt 2023)

40
Johnson & Johnson (NYSE: JNJ)

JNJ 2021 2022 2023 Industry/Peer

Healthcare

Valuation multiples

P/E 21.57 25.74 29.60 48.80

EV/EBITDA 14.91 16.50 16.75 16.54

Financial Performance

D/E 0.46 0.52 0.61 3.62

ROE (%) 29.90 23.70 36.72 25.34

Net Margin (%) 22.26 18.90 13.35 11.01

EPS ($) 2.55 2.35 2.80 0.52

Appendix 3. Valuation metrics of JNJ (YahooFinance 2023) (SimplyWallSt 2023)

Due to a strong growth across healthcare sectors, JNJ gained more than 4% of pharmaceutical
sales over the past year (Constantino 2023). The earnings were also driven by the release of new
cancer treatments Darzalex and Stelara (Reuters 2023). Keeping a low debt-to-equity ratio
compared to the healthcare sector with sufficient on-hand cash has elevated the prospective
capital investment opportunity for the company (Appendix 4). With the P/E significantly valued
below the median industry census, JNJ is currently traded at a discount price (Appendix 3). The
current price trading also highlighted a 32.7% undervaluation, prompting a high-growth potential
(Figure 12). Therefore, JNJ offers a ‘buy’ signal with promising growth.

41
Appendix 4. JNJ’s debt-to-equity ratio from 2013 to present (SimplyWallSt 2023)

Appendix 5. Fair valuation of JNJ using DCF model (SimplyWallSt 2023)

42
Unsystematic risks of WMT and JNJ

WMT
Walmart encounters strong competition from other well-grounded wholesale operators and
retailers as it shifts to an omni-channel strategy post Covid pandemic. WMT recently reported
failure to set competitive prices to offset losses, leading to multiple stores closure in Chicago last
Tuesday (Howland 2023). WMT also faces lawsuits regarding to discrimination against disabled
workers, adversely affecting the company’s recognition (Stempel 2023). The firm’s 10-K report
shows the warning of capital deficit, where the current assets fall $16.5B less than the total
liabilities, raising short-term liquidity concerns (Walmart 2023). Overall, WMT faces financial,
litigation, and strategic risks.

JNJ
Operating in a highly competitive healthcare production brought intense challenges over its
rivals. JNJ’s failure to secure tuberculosis treatment patent protection in India signals a
significant decline in revenue in the upcoming year (Mukherjee 2023). Experts estimate a
potential $2.3B loss due to the misplacement in India's market. JNJ was also against multiple
pledges over cancer-causing talc found in its most well-known J&J baby powder, causing $8.9B
penalties and was forced to stop ongoing production (Sperling 2023). Overall, faces operational,
financial, and legal risks.

Appendix 6. BAC Beta

43
44
45
46
47