Question

• What are the major sources of investment risk associated with today's COVID-19 pandemic and how does that impact a portfolio's diversification strategies? What are the advantages and disadvantages of using ETFs in the current bear and volatile market?

• Describe the Treasury yield curve today and what is it telling us about future economic growth in the US?

Answer 1

sources of investment risk

1.High volatility in markets and indexes is the biggest risk. Stock prices can go in either direction.

2. Market interest risks: Interest rates dropped to close to zero values, and bond prices have soared because of this.

3. Growth rates have dropped drastically, this would reduce company earnings forecasts, growth, and thereby stocks would reduce further. Central banks are trying to cut rates (and do repo operations) to induce growth and liquidity

4. Correlations are increasing across asset classes.

impact on portfolio's diversification strategies:

1. Correations are increasing, no matter how much we diversiify, increasing correlation will spoil the retun- risk. Investing .

2. investing in safe havens like gold will act as a protection.

3. taking positions in options and derivatives will help capture volaity returns.

using ETFs:

1. cost of investments are low

2. when markets start recovering, etf's perform much better and faster than others.

3. liquidity is high

4. ETF s are less volatile, dont fall in value as much as stocks and other assets , if we observe historical numbers.

Yield curve:

1. Long term yields are all time low. Inflation and economic growth expectation dropped hence long term yields dropped as a reaction to the bearish expectations

2. Long term rates lower than short term, yield curve becomes invetreted, showing recession

3. Fed is trying to pump liquidity, trying to push growth and inflation, in a bid to increase long term rates and make the curve back to normal

4. future growth is sluggish and indicates recession. Fed is trying to pump money in huge number to push liquidity and inflation, but inflation is still very low