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MBA737-01, Corporate Finance, Prof. Dharmendra Singh, By Waqas Sher Zaman, 5 Dec, 2014

Assignment: Equity Analyst Project: Individual Asset

Allocation Exercise
Manufacturing industry (Medical care industry)

Prof: Dharmendra Singh

Date: December 7, 2014

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MBA737-01, Corporate Finance, Prof. Dharmendra Singh, By Waqas Sher Zaman, 5 Dec, 2014

Introduction:
Asset allocation is a strategy which aims at balancing the risks and rewards when assets are
allocated 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 in
2012 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 of
4% 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 stock
markets. This is due to the annual rate of interest fixed over the life of the security. Since
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MBA737-01, Corporate Finance, Prof. Dharmendra Singh, By Waqas Sher Zaman, 5 Dec, 2014

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 economic
conditions have carried out and the asset allocation has been done in the table below

Asset

U.S Equities

U.S 30-Years Treasury

Bonds

Cash

Total

Allocation

50%

30%

20%

100%

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MBA737-01, Corporate Finance, Prof. Dharmendra Singh, By Waqas Sher Zaman, 5 Dec, 2014

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_usmarket-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,
from http://www.thisismoney.co.uk/money/investing/article-2738011/As-Americaproving-star-invest-US-stock-market.html
4. Gula, A. (2010, March 30). Treasuries: The Top 7 Reasons to Buy Now. Retrieved
December 9, 2014, from http://www.wallstreetdaily.com/2014/03/20/treasuries/

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MBA737-01, Corporate Finance, Prof. Dharmendra Singh, By Waqas Sher Zaman, 5 Dec, 2014

Appendix-A

Asset Allocation

U.S Equities

U.S 30 Years Treasury Bonds

Cash

Chart 1: Asset Allocation

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

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MBA737-01, Corporate Finance, Prof. Dharmendra Singh, By Waqas Sher Zaman, 5 Dec, 2014

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