Advanced Investments Final Reflection

Course Context

Subject: Advanced Derivatives / Portfolio Management
Assignment Weight: 20% of Final Course Grade
Due Date: (Instructor to specify)

Assignment Overview

Throughout the semester, you managed a portfolio on behalf of an Aggressive Growth client with a high tolerance for risk and a primary objective of maximum capital appreciation.

Your final task is to submit a formal Investment Committee Report. In this report, you must articulate and defend your investment strategy, demonstrate compliance with the client’s mandate, and evaluate portfolio performance using appropriate risk-adjusted metrics.

The focus of this assignment is not on raw returns alone, but on how risk was assumed, managed, and compensated. You must determine whether your excess performance (or underperformance) was a result of specific investment decisions or simply broad market exposure.

Part 1: Portfolio Requirements and Constraints

1. Sector Exposure

The client mandate required exposure to at least 3 distinct sectors.

  • Include a sector allocation pie chart from your final portfolio state.
  • Did you maintain this diversification throughout the semester, or did the portfolio become meaningfully concentrated in one area?
  • If concentration occurred (Style Drift), provide a justification for why this specific risk was acceptable given the client’s aggressive objectives.

2. Use of Derivatives

You were required to employ advanced instruments (e.g., options or futures) to either enhance returns or manage risk.

  • Identify one derivative strategy you implemented (e.g., covered calls, protective puts, futures hedging).
  • Briefly explain the mechanics of the trade.
  • Evaluate whether the strategy successfully reduced volatility, altered the portfolio’s risk profile, or enhanced returns—and explicitly state whether its use was appropriate for this specific client.

Part 2: Risk and Performance Analysis

Compare your portfolio’s performance to the benchmark (S&P 500) using the risk-adjusted performance metrics provided within Stock-Trak, and interpret what they reveal about your strategy and risk exposure. Strong responses will emphasize cause-and-effect relationships between strategy, risk exposure, and outcomes, rather than restating reported values.

1. Beta (Systematic Risk)

  • Was your portfolio’s Beta meaningfully above or below 1.0 for most of the semester?
  • Given the client’s aggressive growth objective, was this level of market risk intentional (strategic) or incidental?
  • Did periods of elevated Beta coincide with higher returns, or did they simply increase volatility without sufficient compensation?
  • If your Beta changed over time, explain what strategic decisions caused that shift.

2. Jensen’s Alpha (Excess Return)

  • Was your Alpha positive, negative, or close to zero over the evaluation period?
  • To what extent can your Alpha be attributed to security selection, timing, or derivative usage, rather than general market trends?
  • If Alpha was negative, what decisions most clearly explain the underperformance?

3. Sharpe Ratio (Risk-Adjusted Performance)

  • How did your portfolio’s Sharpe Ratio compare to the S&P 500?
  • If your total return exceeded the benchmark but your Sharpe Ratio was lower, explain why your risk profile was inefficient.
  • Would a professional investment committee view your risk-adjusted performance as acceptable for this client? Why or why not?

Part 3: Trade Decisions and Strategy Review

1. Trade Documentation

  • Access your Trade Notes and Transaction History within Stock-Trak.
  • Export your transaction history and trade notes.
  • These two spreadsheets document your decision-making throughout the semester and will be reviewed as part of this assignment.

2. Best and Worst Trades

Identify your 5 best trades and 5 worst trades. For each trade, address the following:

  • Identify the key macroeconomic or firm-specific factor that influenced price movement.
  • Explain why the trade was appropriate—or inappropriate—given the client’s objectives and risk tolerance.
  • Evaluate your use of order types (Limit/Stop) and timing in managing entry and exit risk.

Submission Requirements

Please submit a single document containing:

  1. An overview of final portfolio value and compliance with the client mandate.
  2. Your Sector Allocation Pie Chart and Equity Curve vs. Benchmark Graph.
  3. Interpretation of Beta, Alpha, and Sharpe Ratio data.
  4. Detailed discussion of the ten selected trades and the derivative strategy employed.
  5. Exported Stock-Trak Transaction History with Trade Notes.

Evaluation Criteria

To receive full credit, your report must demonstrate:

  • Correct interpretation of Alpha, Beta, and Sharpe Ratio and their implications for portfolio strategy and risk-taking.
  • Clear evidence that the client’s constraints and objectives were met.
  • Risk-taking decisions that are justified within the context of the client profile.
  • Professional presentation, including clear charts (e.g., equity curve vs. benchmark) and logical narrative flow.
  • Trade Notes that reflect contemporaneous documentation rather than hindsight reconstruction.