This assignment will help you develop your trading sophistication, as well as your understanding of concepts taught in class, such as diversification, asset allocation according to different risk profiles, and risk management.
See the AI Grading Rubric for details on what we are tracking for you throughout the semester.
Key Learning Objectives:
- Develop/improve your understanding of diversification across industry sectors or geographic regions
- Help you develop/improve your sense of risk and return, along how to actively manage risk over time
- Help you develop/improve your trading sophistication across equities and fixed income products
- Encourage collaboration among students
As a class, you will manage two $100 million portfolios for two sets of clients.
The first set of clients is very risk averse, and has profile LORISK. These investors seek capital appreciation and income, but are more concerned with the risk of losing money. This portfolio will invest between 10% - 30% in equities, and 70%-90% in fixed income and cash alternatives.
The second set of clients is risk-tolerant, with a profile HIRISK. These investors prioritize returns and are looking to outperform the rate of return offered by the benchmark (S&P 500 Index). It will be invested between 80% - 100% in equities.
The class is the investment committee, charged with making the following asset allocation decisions for the two portfolios:
A. Decide how much to invest in equities and how much in fixed income, within the
B. Within the realm of equities, decide how much to allocate between:
a. US, developed international, and emerging markets
b. Within the U.S., between value and growth stocks or funds
c. Within the U.S., between large cap and small cap
C. Within the realm of fixed income, decide how much to allocate between:
a. Short term vs. long term bonds
b. US Treasuries vs. investment grade corporates vs. high yield bonds
These core asset allocation decisions must be made for both LORISK and HIRISK portfolios.
Asset allocation teams:
Teams 1A & 1B:
- Decide if we should overweight or underweight equities within the stated range of parameters.
- 1A for LORISK and 1B for HIRISK.
Teams 2A & 2B:
- Decide how much to allocate between US equities, international equities, or
emerging markets equities within the equity portion of the portfolio.
- 2A for LORISK and 2B for HIRISK.
Teams 3A & 3B:
- Decide for US stocks, how much to allocate between value vs. growth stocks.
- 3A for LORISK and 3B for HIRISK.
Teams 4A & 4B:
- Decide for US stocks, how much to allocate among small cap, mid cap, or large cap stocks.
- 4A for LORISK and 4B for HIRISK.
Teams 5A & 5B:
- Make a decision as to how much to invest in longer term US bonds vs. shorter
term US bonds and/or corporates, within the fixed income portion of the portfolio.
- 5A for LORISK and 5B for HIRISK.
Teams 6A & 6B:
- Must decide how much to allocate among U.S. Treasuries, investment grade corporate bonds or high yield debt.
- 6A for LORISK and 6B for HIRISK.
**The class must rebalance the portfolio weekly and record performance relative to the benchmark.**
- At beginning of exercise: Summarize your team’s chosen strategy, and why (a rationale) you chose it.
- At beginning of exercise: Each team must make an argument for underweighting or overweighting (“a bet”) the assigned market.
- Weekly: Rationale for every trade while rebalancing.
- Weekly: Evaluate prior week’s rebalancing, presenting relative performance data and whether your team made the right or wrong decision.
- Weekly: Evaluate your strategy, the investment decision you made, and what is
happening in your markets. Should your initial strategy be continued or abandoned? Monitor the performance of your decision.
- At end of exercise: why do you think your bet turned out right (or wrong?) In retrospect, would you have done anything different, and why? Did you learn anything in particular from the exercise?
**Help us shape the assignments! We would love to collaborate on making them better and adding more content. Can’t wait to hear from you!
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