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.

Answer 1

Systematic risks involved in current environment are-

A. A health crisis which is triggering an economic collapse worldwide.

B. Global consumer demand has already dried up.

C. 2020 United States Elections in such scenarios

After consideration of these systematic risks, If I had to invest $1000000, My portfolio allocation would be 60% stocks , 20% bonds 20% cash. This is because-

A. I'm overall bullish on the prospect of the American economy and I feel like it would be first one to recover after such shock and demand has shrunk for a temporary period and it will come back strongly once this whole economic mayhem is over. I'm betting 60 percent over stocks as I feel after recent correction of more than 30% in index, several stocks are at discount and could be a better bet for coming 12 months.

B.20% Cash because I keep cash as an emergency fund which provides me with the option of investing more, As markets corrects more but also provides me with a sense of security in such Times and it is kept as if the I could survive onto cash for ba few months of things turn very ugly.

C.20% Bonds- I'm not personally fond of owning bonds but they also acts as a hedge in such tough times of uncertainty so it is always wise to diversify your asset class and bonds also provide with an option of periodic repayments so it can take care of expenses as well.