The Week 5 Case Study Assignment is the fourth of a series of analytical tasks, spanning several weeks. 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. In Week 5, submit a combined analysis of your allocation among the three asset classes. Combine your analysis from the previous three weeks into one final paper and include a conclusion summarizing your findings over the course of the 4-week project. APA FORMAT.
The goal is to maximize your expected return over the next 12 months.
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PREVIOUS 3 WEEKS CASE STUDIES ARE ATTACHED.
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CORPORATE FINANCE MANAGEMENT 2
Corporate Finance Management
Jessica Trundle
Dr. Debra Touhey
Upper Iowa University
1/30/2021
The American economy is one of the most stable and is also doing so well in terms of growth. It is important to look into the different factors before making the corporate financial decision in the United States. The three areas of investment presented in the scenario are U.S. equities, treasury bonds, and cash. Before the decision to allocate the $ 1,000,000 is made, it is important to assess the returns and the policies under which the specific asset operates.
The asset that needs to be given the larger percentage is the U.S. equities, which is the stock in the country’s companies. Approximately 50% of the allocation should be directed on this asset because the return, in this case, is dependent significantly on the industry performance. Most of the United States companies are operating on profit, which keeps on increasing based on different factors. Therefore, one should ensure that the U.S. equities bought are from a company that gets reasonable income in terms of profit, which will ensure the returns on the allocation or the investment is favorable. Durham et al., 2020).
The next asset that needs to be given significant consideration in the allocation process is the Treasury bonds. The treasury bonds get to mature between six months and one year. This means the investment used in this area will earn a substantial interest at the end of the year, which will also be lucrative to the investor. The U.S. Treasury bonds are more predictable as the government is obliged to pay regardless of the year’s business performance. Out of the allocated amount, the investment that should be directed on the treasury bond should be approximately 30% of the $1,000,000 (Zaremba , et al., 2019).
The remaining money should be held 9n cash on the optimistic motive that an investment idea may come up which will need the individual to invest in. The U.S. economy seems favorable when it comes to equities and Treasury bonds; therefore, they should be given priority in the investment process of the 12 months.
References
Durham, J. B. (2020). U.S. Treasury Bond Betas: 1961â2019. The Journal of Fixed Income, 29(4), 20-47.
Zaremba, A., Kambouris, G. D., & Karathanasopoulos, A. (2019). Two centuries of global financial market integration: Equities, government bonds, treasury bills, and currencies. Economics Letters, 182, 26-29.
ASSET CLASSES ANALYSIS 4
Asset Classes Analysis
Jessica Trundle
Upper Iowa University
2/14/2021
Analysis of the asset classes’ prospects and justification
The three asset classes have different earnings, and at the same time, they are affected by different factors. The main aim, in this case, is to maximize earnings in the next twelve months, and that means that the allocation of the $1,000,000 will be purely based on the ability of an asset to increase earnings (Campos, Sharma, Gabiria, Jantunen, & Baglee, 2017). Assets that have the minimal potential of increasing the earnings will receive the smallest share. U.S. Equities will receive 50% of the amount of money, which will sum up to $500,000. Different reasons have motivated the allocation of a significant amount to U.S. Equities. First, the maximum time they take to mature is 12 months, which is within the goal set. In the case of an increased price of shares, one can sell the equities and make a considerable profit. Second, investing in a profitable U.S. organization will increase returns. Profitable organizations pay high dividends, and that means that there are chances of making high returns.
Out of the $1,000,000 that has been presented, 10% will be allocated to U.S. Treasury bonds. The reason for allocating such a minimal amount is associated with the returns that will be made out of the investment. A bond will mature in the next 10 to 30 years (Campos et al., 2017). The plan is to increase revenue in the next 12 months. This case means that the money will not have any return in the next 12 months. A treasury bond has a fixed earning or returns, making money dormant (Campos et al., 2017). Cash assets will receive 40% of the money, which translates to $400,000. Cash has no fixed or set returns, and this is why some organizations and investors disregard investing so much in cash assets. However, it is important to know and understand the power of cash. In between the 12 months, an investment opportunity might avail itself (Campos et al., 2017). For example, purchasing an asset at a low price and selling it at a higher price is how cash assets could significantly increase the earnings in only a short period.
Reference
Campos, J., Sharma, P., Gabiria, U. G., Jantunen, E., & Baglee, D. (2017). A big data analytical architecture for the Asset Management. Procedia CIRP, 64, 369-374.
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Systematic Risk Analysis
Jessica Trundle
Upper Iowa University â BA 341
02/07/2021
Systematic Risks Analysis
Systematic risks analysis is very crucial when determining the events that can possibly affect the economy (Brunel et al., 2020). The systematic risks that are involved in the US macroeconomic include; health crisis (COVID-19) which has been bringing the US economy down, global demand and finally, the elections of the United States of America. After these three systematic risks are taken into consideration, suppose I was to invest the one million American Dollars, my allocation would be as follows. I would allocate 60% for the US Equity and stock, then 20% for the US Treasury bonds and finally, the last 20%for cash. My justifications are on the next paragraph.
Firstly, the allocation of 20% for cash is because I believe that cash is kept as an emergency fund which will give me the option of investing it somewhere else. Cash is important as it provides a sense of security in case thing do not turn out to be good. Additionally, in case of anything, one can survive with the cash that has been set aside. Secondly, my allocation of 20% for the bond is because, personally, I do not like owning bonds but the main reason why I am allocation such percentage is because bonds can help in case of uncertainties and additionally, bonds will provide the options of paying for a certain period of time and catering for other expenses too. I will also allocate the 20% on bonds because it is wise to invest in different asset classes. Lastly, I would allocate 60% for the US equity because I am sure that the US economy will come back strong very fast. Currently, several stocks have highly been discounted and hence allocating 60% of the one million dollar on US Equity is a wise decision (Brunel et al., 2020).
In conclusion, when allocating the one million dollar, I would allocate 60% on the US Equity, 20% on the US Treasury Bonds and finally, 20% on cash.
References
Brunel, J. L., Idzorek, C. T. M., & Mulvey, C. J. M. (2020). Principles of Asset Allocation. Portfolio Management in Practice, Volume 1: Investment Management, 211.
