Question

I need step by step instructions on where to find the information to answer this question:

Your task involves an analysis of general economic conditions or systematic risk, i.e., the risk that affects all industries and companies, in the U.S. macroeconomy. Your goal is to determine in percentage terms an optimal allocation of $1,000,000 among the following three asset classes: U.S. equities, U.S. Treasury bonds, and cash.

The goal is to maximize your expected return over the next 12 months.

Complete an analysis of the asset classes' prospects and your justification of your allocation of monies among them.

Answer 1

Systematic risks involved in the current environment depends on numerous factors such as:

• Age of the investor
• Health crisis which is triggering an economic collapse worldwide
• Risk Appetite
• Uncertainties about general economic conditions
• Global consumer demand has already dried up
• Time horizon if the investment
• 2020 United States Elections in such scenarios
• Chances of any urgent withdrawal
• Monetary and fiscal policy
• Exchange rates, inflation
• The state of the global economy
• Unemployment levels
• Productivity and many others

Depending on all this Risk, Return, Liquidity, Payback period, etc should be analyzed for all assets classes, and proper allocation should be made.

After consideration of these systematic risks, If I had to invest $1000000, My portfolio allocation would be as follows

Investment options	Proportions	Allocation
U.S equities	60%	$600,000
U.S Treasury bonds	30%	$300,000
Cash	10%	$100,000

By this allocation, the investor will be able to maximize return with low risk. In addition to this, the investor will be in a position to avail of market opportunities and get extraordinary profits. The following points show that each investment option has its significance which is required to be considered by investors while making such decisions.

• Diversification is considered to be a crucial aspect in decisions related to investment as it assists investors in reducing the risk of loss and increases chances for maximization of profits.

• For diversification, it is essential to allocate an optimum percentage to equities, Treasury bonds, and cash

• Historically equities outperform bonds in terms of average return but they also carry more risk as defined by their standard deviations

• Equities are the most in any Investment Portfolio. It is the only assets class that can beat inflation and give higher returns, which can lead to an enormous wealth creation through the magic of compounding.

• Equity will cover a maximum percentage of stock equity as it is highly profitable, but it will be risk-oriented.

• Investment in Treasury Bills is safe but they have a lock-in period and therefore cannot be encashed immediately.

• The decision to invest in 30-year U.S Treasury-bonds involves expectations about future inflation and the term structure of interest rates i.e., “the relationship between short- and long-term interest rates”

• The market value of 30-year bonds will fall and the fall will be more dramatic for a 30-year T-bond than for a 10-year Treasury bond. Conversely, price gains from any drop in rates will be more dramatic the longer the term to maturity on a bond. One should also keep in mind that while in general longer-term rates are typically higher than short-term rates for the same level of overall risk, there have been occasions when the reverse is true, and the term structure of interest rates is inverted.

• I'm not personally fond of owning bonds but they also act as a hedge in such tough times of uncertainty so it is always wise to diversify your asset class and bonds also provide an option of periodic repayments so it can take care of expenses as well.

• Assume no return on that share of your monies held in cash. This analysis necessarily involves your assessment of systematic risk, i.e., the risk that affects all industries and companies, in the U.S. economy over the next twelve months.

• keep cash as an emergency fund which provides with the option of investing more, As markets correct more but also provides me with a sense of security in such times and it is kept as to survive onto cash for a few months of things turn very ugly.

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