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This document contains sample solutions and grading criteria

Sample Portfolio 1: Conservative

Allocation Strategy

Risk Profile: Low risk, stable income preference

Market View: Uncertain, prepare for downside

Strategy Allocation Percentage Rationale
USDC Lending (Aave) $5,000 50% Core stable yield
ETH/USDC LP $3,000 30% Moderate yield with some upside
Hold USDC $2,000 20% Emergency liquidity
ETH Staking $0 0% Too much price risk
Yield Farm $0 0% Too risky
TOTAL $10,000 100%

Scenario A: Bull Market (ETH +50%)

Calculations

USDC Lending: $5,000 × 0.08 = +$400
ETH/USDC LP: ($3,000 × 0.30) + ($3,000 × -0.0202) + ($3,000 × 0.25) = $900 - $60.60 + $750 = +$1,589.40
Hold USDC: $2,000 × 0 = $0

Total Return: $1,989.40 (19.89%)
Final Value: $11,989.40

Scenario B: Sideways Market (ETH 0%)

Calculations

USDC Lending: $5,000 × 0.08 = +$400
ETH/USDC LP: $3,000 × 0.30 = +$900 (no IL, no price change)
Hold USDC: $2,000 × 0 = $0

Total Return: $1,300 (13.00%)
Final Value: $11,300

Scenario C: Bear Market (ETH -50%)

Calculations

USDC Lending: $5,000 × 0.08 = +$400
ETH/USDC LP: ($3,000 × 0.30) + ($3,000 × -0.0572) + ($3,000 × -0.25) = $900 - $171.60 - $750 = -$21.60
Hold USDC: $2,000 × 0 = $0

Total Return: $378.40 (3.78%)
Final Value: $10,378.40

Analysis

Best Scenario: Bull market (19.89% return)

Worst Scenario: Bear market (3.78% return)

Portfolio Characteristics:

  • Positive returns in all scenarios (downside protection)
  • Conservative allocation avoids major losses
  • Misses significant upside in bull market
  • 50% USDC lending provides stable income floor

Sample Portfolio 2: Aggressive

Allocation Strategy

Risk Profile: High risk, maximum yield seeking

Market View: Bullish on ETH, willing to take protocol risk

Strategy Allocation Percentage Rationale
ETH Staking $4,000 40% Maximize ETH exposure
ETH/USDC LP $3,000 30% High yield + partial ETH exposure
Yield Farm $2,000 20% Chase 100% APR
USDC Lending $1,000 10% Small safety buffer
Hold USDC $0 0% Opportunity cost too high
TOTAL $10,000 100%

Scenario A: Bull Market (ETH +50%)

Calculations

ETH Staking: ($4,000 × 0.04) + ($4,000 × 0.50) = $160 + $2,000 = +$2,160
ETH/USDC LP: ($3,000 × 0.30) + ($3,000 × -0.0202) + ($3,000 × 0.25) = +$1,589.40
Yield Farm: $2,000 × 1.00 × 0.8 = +$1,600 (80% survival probability)
USDC Lending: $1,000 × 0.08 = +$80

Total Return: $5,429.40 (54.29%)
Final Value: $15,429.40

Scenario B: Sideways Market (ETH 0%)

Calculations

ETH Staking: $4,000 × 0.04 = +$160
ETH/USDC LP: $3,000 × 0.30 = +$900
Yield Farm: $2,000 × 1.00 × 0.7 = +$1,400 (70% survival probability)
USDC Lending: $1,000 × 0.08 = +$80

Total Return: $2,540 (25.40%)
Final Value: $12,540

Scenario C: Bear Market (ETH -50%)

Calculations

ETH Staking: ($4,000 × 0.04) + ($4,000 × -0.50) = $160 - $2,000 = -$1,840
ETH/USDC LP: ($3,000 × 0.30) + ($3,000 × -0.0572) + ($3,000 × -0.25) = -$21.60
Yield Farm: $2,000 × 1.00 × 0.5 - $2,000 × 0.5 = +$1,000 - $1,000 = $0 (50% rug pull risk)
USDC Lending: $1,000 × 0.08 = +$80

Total Return: -$1,781.60 (-17.82%)
Final Value: $8,218.40

Analysis

Best Scenario: Bull market (54.29% return)

Worst Scenario: Bear market (-17.82% loss)

Portfolio Characteristics:

  • Extreme volatility: +54% to -18% across scenarios
  • High correlation to ETH price (70% exposure)
  • Yield farming adds significant upside potential
  • Minimal downside protection in bear market

Sample Portfolio 3: Balanced

Allocation Strategy

Risk Profile: Moderate risk, diversified approach

Market View: Neutral, hedging both directions

Strategy Allocation Percentage Rationale
ETH/USDC LP $3,500 35% Best risk-adjusted yield
USDC Lending $2,500 25% Stable income component
ETH Staking $2,000 20% Long-term ETH conviction
Yield Farm $1,000 10% Small speculative bet
Hold USDC $1,000 10% Liquidity reserve
TOTAL $10,000 100%

Performance Summary

Scenario Total Return % Return Final Value
Scenario A (Bull) +$3,644.13 36.44% $13,644.13
Scenario B (Sideways) +$2,125 21.25% $12,125
Scenario C (Bear) +$143.87 1.44% $10,143.87

Analysis

Key Insight: This portfolio remains profitable in ALL scenarios, demonstrating effective risk management.

Strengths:

  • Diversified across 5 strategies
  • 35% allocation to ETH/USDC LP captures high yield with manageable IL
  • 25% USDC lending provides stable base
  • Positive returns even in worst-case bear market

Trade-offs:

  • Lower upside than aggressive portfolio (+36% vs +54% in bull market)
  • Better downside protection (+1.44% vs -17.82% in bear market)

Grading Guidance

Full Credit Criteria (50/50 points)

1. Portfolio Allocation (10 points)

  • Valid total (5 pts): Exactly $10,000
  • Diversification (3 pts): At least 2 strategies, no single strategy >80%
  • Logical rationale (2 pts): Allocation matches stated risk tolerance

2. Impermanent Loss Calculations (10 points)

  • Correct formula (4 pts): Uses IL = 2√(r)/(1+r) - 1
  • Scenario A (3 pts): -2.02% IL correctly applied
  • Scenario C (3 pts): -5.72% IL correctly applied
  • Partial credit: Give 2/3 points if calculation method is right but arithmetic is wrong

3. Scenario Modeling (10 points)

  • All 3 scenarios complete (4 pts): Calculated returns for A, B, C
  • APR applied correctly (3 pts): Each strategy earns stated APR
  • Price impacts correct (3 pts): ETH positions gain/lose appropriately
  • Common error: Forgetting that LP is 50/50 exposure (gains only half of ETH's move)

4. Written Justification (10 points)

  • Risk tolerance stated (3 pts): Clear identification of conservative/moderate/aggressive
  • Best scenario identified (3 pts): Correctly identifies which scenario favors their portfolio
  • Trade-offs discussed (4 pts): Acknowledges yield vs. safety balance
  • Look for: Understanding of IL, protocol risk, price exposure

5. Presentation (10 points)

  • Clarity (4 pts): Explains portfolio in 2 minutes
  • Insights (4 pts): Discusses what they learned about DeFi risk/reward
  • Professionalism (2 pts): Organized, prepared, confident

Common Student Mistakes

  1. Applying IL to non-LP strategies - Only ETH/USDC LP has IL
  2. 100% allocation to yield farm - Red flag for understanding risk
  3. Forgetting APR - Students calculate price impact but forget the 30% LP fees
  4. Wrong IL sign - IL is always negative (a loss)
  5. Treating ETH staking like LP - Staking has no IL, only price risk
  6. Not showing work - Partial credit requires visible calculations

Discussion Prompts for Class

  • "Who had the highest return in the bull market? What was your allocation?"
  • "Did anyone remain profitable in all 3 scenarios? How?"
  • "What's the trade-off between ETH/USDC LP (30% APR) and ETH staking (4% APR)?"
  • "Would you actually put 100% in the yield farm for 100% APR? Why not?"
  • "How would leverage (borrowing to invest) change your risk/reward?"

© Joerg Osterrieder 2025-2026. All rights reserved.