2.Discuss on analysis of the Economic conditions and Risk.
3.What is your recommendation and justification for, in percentage terms, of an optimal allocation of $1,000,000 among the three asset classes?
1.General Economic Coniditions In The U S Macroeconomy
The economic condition of the United States has geared up after the end of the Second World War. The era has been thereafter regarded as the Golden Era for the economy of United States. In the every sphere whether is it manufacturing sector or the service sector, the country has delivered the tremendous growth till 1970’s but after that for some years stagflation has come but by the 1980’s and onwards the country has been able to deliver the unprecedented growth and has raised the wave of the competition across the world globally.
Apart of having the challenges in each ways at the local level, the economy of the United States is still regarded as the largest economy and is considered as the most important economy across the world. The same fact is further corroborated when the Recession of the year 2008 in the United States has crashed the market globally and no business was able to survive at that time. The country has the highest per capital Gross Domestic Product amounting to 57,436 USD per person as on the year ending two thousand and sixteen (OECD, 2017).
Along with the high per capita Gross Domestic Product, the country has been facing challenge of current account deficit. This current account deficit is majorly because of payments made to foreigners are in excess of the receipts from the foreigners. This deficit was countered by the capital account surplus which was achieved by the receipts from abroad for the capital account transactions. United States approximately received 80% of FDI and that too comes from majorly nine countries and thus gets help to set of thee current account deficit.
In this way, the economic condition of United States is challenging but it is gearing up on year on year basis. Beginning with great boom and then coming across the great depression period and then again having the baby boom generation, the United States is now the one of largest country having the economies of scale.
2.Discussion On Analysis Of Economic Conditions And Risk
The United States has strengths as well as weaknesses in almost all spheres of economy. The strengths are – United States is the world’s largest economy, it has the system where there are proper Governmental checks, it has delivered the high per capital Gross Domestic product, the country has been the number one in providing the data with full transparency and the currency of the country is strong as compared to others.
Apart from the aforementioned strengths the country has the weaknesses also like the country has been facing the structural unemployment, the Tax rate for the corporate is much higher due to which the disclosure of revenue is much lesser in actual or real terms, the continuous deficits in the current account balance of the country has been prevailing, the strategies and policies adopted by the Federal Reserve Bank is very rigid and the country has been facing the lack of skilled workers due to which the productivity has been made lower in the real terms.
As per the current economic condition that is prevailing after the appointment of Donald Trump, the country has been facing various risks. One of the major risks that the corporate including the small and medium enterprises are facing is that the tax reform has been kept in pipeline instead of implementing the same at the earliest. The major tax reform was to decrease the tax rate and as per the current scenario, the country has doubt that the same will be implemented in the year 2018 or not. Second major risk that the country is facing is from Federal Reserve Bank whose decision is to reduce their balance sheet by increasing the interest rates on long term basis. This will give the major impact not in the year of 2017 but in the year of 2018 (Coface, 2017).
3.Recommendation For Allocation Of $1,000,000 Among Three Asset Classes
There are three assets classes – US Equities, US Treasury Bonds and Cash.
US Equities are shares of the company and the holder of the US equities will carry the voting right if it is common stock and in case he is the holder of preferred stock then he will receive the preference dividend.
US Treasury bonds are the bonds which entitle the holder the right to receive interest till the time amount is advanced to the company and the company does not repay the bond.
Cash includes the cash and cash equivalents including the Treasury bill and certificates of deposits. Though treasury bills are tax saving, but these securities carry less interest rate.
In the given case, the investor has $1,000,000 and in order to have the better return within 12 months based on the current economic conditions of the United States, the investor shall adopt the following optimal allocation:
- $5,00,000 in the US Equities
- $2,50,000 in the US Bonds
- $2, 50,000 in the Cash and cash equivalents (OECD, 2017).
Coface, (2017),”United States : Risk Assessment”, available on accessed at 11/08/2017.
OECD, (2017), “Developments in Individual OECD and Selected Non – Member Economies – United States”, OECD Economic Outlook, Vol 2017, Issue 1, Pp 258 - 262