Individual Asset Allocation Exercise

8/10/2019 Individual Asset Allocation Exercise

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MBA737-01, Corporate Finance, Prof. Dharmendra Singh, By Waqas Sher Zaman, 5th

Dec, 2014

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Assignment: Equity Analyst Project: Individual Asset

Allocation Exercise

Manufactur ing industry (Medical care industry)

Prof: Dharmendra Singh

Date: December 7, 2014


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Introduction:

Asset allocation is a strategy which aims at balancing the risks and rewards when assets areallocated based on individual goals, investment horizon and risk tolerance. Assets has three

main classes which are equities, fixed income or bonds, and cash and its equivalents. All of

these three assets categories have different level of risks and returns associated with them and

therefore, each one of them will act differently over the time period.

This paper involves an analysis of general economic conditions or systematic risk in the U.S

economy. USD 1,000,000 has to be allocated in percentages in the three asset classes of U.S

equities, U.S Treasury bonds, and cash in order to maximise the returns in the next 12months.

Analysis:

According to The Economics Times, US economy is one of the world largest economy and it

accounts 21.67% of worlds GDP share(1). GDP of US in the year 2010 was 14.958 trillion

which increased to 16.8 trillion in the year 2013 showing an increase of 11% during this

period. Increasing GDP shows a healthy sign of investing in U.S equities because there will

be more business activities which will result in higher profits of the corporate organization.

Increase in GDP shows the increasing consumer confidence after the economic crisis of 2008.

The increase in GDP has a direct relation with the unemployment rate. Unemployment in2012 was 8.1% which reduced to 7.3% in 2013 and hence shows positive signs of stable and

improving labour market and hence more people will have money to invest in the economy

(2). However, this will lead to a situation where there will be shortage of jobless people

which will force the corporate companies to hire people at additional wages and cost.

Therefore, interest rates can be increased by the Federal Reserve when wage inflation seems

to be threatening which will affect the bond and stock market and it can be a risk to consider

when investing in a U.S equity market.

However, This is Money reports that of the U.S economy is has growth at the annual rate of4% in the second quarter of the year 2014 which has led to picking up of house building,

reduction in unemployment, and increasing consumer confidence. The U.S dollar is getting

stronger by each day and inflation is also staying low due to which company profits are

increasing while at the same time U.S has achieved benefits from the slowdowns in the

emerging markets of India, Turkey and Brazil. This has forced the investor to move back to

invest in the safer markets like U.S. (3). Due to all above reason it is safe to say that almost

50% of U.S 1,000,000 should be invested in U.S equities.

Treasury bonds are one of the safest asset categories to invest in when compared to stockmarkets. This is due to the annual rate of interest fixed over the life of the security. Since


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treasury bonds are related to the currency therefore we have to look at the U.S. dollar.

According to Wall St Daily, U.S dollar is the leading currency of the world even though it is

flawed. It has been observed that the trade-weighted U.S. dollar index has increased in the

past 3 years and it has gained more when compared with the currencies of the emerging

markets (4). The objective of any investor is to have increased dividends but it is not a wised

to make 100% investments in the equities because of unchanging market and unpredictable

future. Therefore, the investment requires diversification and by investing in U.S 30 year

treasury stock allows the investor to increase its wealth at the lowest risk (4). However, the

only important point to note over here is the rate of U.S treasury rates has declined over the

past few year as shown in the chart 2 of the Appendix-A. Therefore, a 30% of U.S.

1,000,000 is recommended to be invested in U.S 30 years Treasury bond.

Cash in hand always have to be kept to make sure that there is financial backing in case of

any emergencies. Since there are always risks in the stock market and bonds because of

increasing interest rates due to inflation therefore having cash in hand will make the investor

to have more flexibility during these emergency periods. Furthermore, cash is a quickest

solution if there is any problem which a company faces. Therefore, 20% of U.S 1,000,000 is

to be kept as cash

Conclusion:

Asset allocation has to be carried in such a way to maximise the gains with the minimum

risks. During the allocation of the asset in this paper it has been make sure that the gains are

maximum with minimum possible risks and therefore a considerable study of U.S economicconditions have carried out and the asset allocation has been done in the table below

TotalCashU.S 30-Years Treasury

BondsU.S EquitiesAsset

100%20%30%50%Allocation


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References

1.

Kumar Singh, S. (2013, August 12). Should you invest in US-focused funds?Retrieved December 5, 2014, from

http://articles.economictimes.indiatimes.com/2013-08-12/news/41332908_1_us-

market-indian-market-sankaran-naren

2. CIA Fact book. Economy: United States. (n.d.). Retrieved December 5, 2014, from

https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

3. Black, H. (2014, August 30). From 666 to 2,000... As America's S&P 500 hits new

heights - should you invest in the US stock market? Retrieved December 5, 2014,

fromhttp://www.thisismoney.co.uk/money/investing/article-2738011/As-America-

proving-star-invest-US-stock-market.html

4.

Gula, A. (2010, March 30). Treasuries: The Top 7 Reasons to Buy Now. RetrievedDecember 9, 2014, fromhttp://www.wallstreetdaily.com/2014/03/20/treasuries/
http://articles.economictimes.indiatimes.com/2013-08-12/news/41332908_1_us-market-indian-market-sankaran-narenhttp://articles.economictimes.indiatimes.com/2013-08-12/news/41332908_1_us-market-indian-market-sankaran-narenhttps://www.cia.gov/library/publications/the-world-factbook/geos/us.htmlhttp://www.thisismoney.co.uk/money/investing/article-2738011/As-America-proving-star-invest-US-stock-market.htmlhttp://www.thisismoney.co.uk/money/investing/article-2738011/As-America-proving-star-invest-US-stock-market.htmlhttp://www.wallstreetdaily.com/2014/03/20/treasuries/http://www.wallstreetdaily.com/2014/03/20/treasuries/http://www.thisismoney.co.uk/money/investing/article-2738011/As-America-proving-star-invest-US-stock-market.htmlhttp://www.thisismoney.co.uk/money/investing/article-2738011/As-America-proving-star-invest-US-stock-market.htmlhttps://www.cia.gov/library/publications/the-world-factbook/geos/us.htmlhttp://articles.economictimes.indiatimes.com/2013-08-12/news/41332908_1_us-market-indian-market-sankaran-narenhttp://articles.economictimes.indiatimes.com/2013-08-12/news/41332908_1_us-market-indian-market-sankaran-naren


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Appendix-A

Chart 1: Asset Allocation

Chart 2: Historical U.S 30 Year Treasury-Bond rates

Asset Allocation

U.S Equities U.S 30 Years Treasury Bonds Cash


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Individual Asset Allocation Exercise