Asset Allocation for the Company - Example

Seminar in finance Objectives This article mainly talks about the better way of choosing an asset allocation that would ensure efficiency for given clients in the given case study. The paper also explains the fundamental reasoning behind choosing a given asset allocation. In this case the article considers the market trends which have influenced the general economic growth in general in the US. Thiw will involve the components that affected the overall GDP growth on the basis of cause and effect. Consequently, analyzing the economic growth will help in ensuring proper asset allocation for an individual client who would like to invest in the existing portfolio. The analysis will be from the year 2012 to 2014 concentrating on the global events that may have impacted on the growth. One of the major factors is financialization considering that it has contributed intrinsically in affecting asset allocation because of the banking system possessing the trading of debt. Large enterprises turned to be opening markets to obtain finance that has eventually forced the banks to seek other profit making processes. Financial expropriation involves obtaining financial profits directly from an individual’s income. Economic growth and overall performance 2012 C + I Major significant events that impacted on consumption and investment include inflation, unemployment rate increase and relation to Europe and China. Even though the subprime market was not large enough to threaten the US economy, it had a massive effect on the parallel growth of investment banking. This occurred through the securitized mortgages. Securitisation involved parceling mortgages into small amounts then putting them into larger composites and finally selling the lots as new securities1. This therefore made particles of subprime debt to get attachment in the securities held by financial institutions across the world. Another significant result was the collapse of personal saving, due to the growing inflation, which approached zero as a percentage of disposable income (Drechsler et al, 321). 2The depreciation is always an aspect related to financialisation, reflecting the participation of individuals in the financial system (Orhangazi 65). As the price of houses continued to rise homeowners got encouragement to remortgage and use the proceeds for other specific purposes. Net x In 2012, the export of goods increased as compared to 2011 with 4.5% change. This insinuates a positive increase in the overall GDP of USA at that particular time. Further the imports during this year rose by 3% even though this did not have influence on the trade deficit. It is important to note that the exports increased despite the witnessed decrease in trading activities with major European countries. The following is a graph showing annual percentage change in exports and import of goods from 2011 to 2012: Retrieved from: http://globaleconomicanalysis.blogspot.com/2013/02/2012-export-growth-by-country-china-and.html Monetary policy Monetary policy had a hand in contributing to the bubble and its eventual burst. The gradual rise of interest rates after 2004 eventually led to an end of the bubble (Lapavitsas 119). Apart from the cheap credit offered by the Federal Reserve Bank, several developed and developing countries found themselves possessing excess of domestic saving than that on investment. This had an effect on the USA causing trade deficits and a shortfall of savings relative to their investment. In order to defend the exchange rates for the protection against the sudden reversals of capital flows, those countries holding more surpluses had to sought for reserves of dollar as a quasi world money. Another strategy that the International Monetary Fund imposed on the developing countries was that of reserve accumulation. This made even the impoverished Africa to accumulate the foreign exchange reserves. Forming the reserves made USA to receive the major surpluses flow despite the low US interest rates. Developing countries therefore became the net suppliers of capital in USA (Lapavitsas 120)3. Government spending In 2012, the US Government held large volumes of Mortgage-backed securities. This crisis emerged during the exhaustion of the US housing boom in 2011 (Lapavitsas 120). The housing market crisis started in subprime mortgages and then eventually spread to other prime sectors. The burst was signified by rising interest rates and falling housing prices that was normally forced by the Adjustable Rate Mortgage (ARM) holders. There was the mutual reinforcement of the problems of liquidity and solvency for banks, which made the crisis in the US progressively worse. The tension between liquidity and solvency became more pronounced because of the widespread adoption of banking practices. Financial turmoil mainly began as a liquidity-shortage in the inter-bank money- market in 2007 and eventually became a solvency crisis4. 2013 C + I During this year, contraction of credit by banks and open markets forced the existing enterprises to cut back on the output and employment. The decrease in employment rate, resulted to less accumulated income by the citizens consequently causing the decrease in consumption. Consumption of other products also declined as worried and over indebted workers reset their expenditure to meet the ensuing economic crisis. Export market especially for the automobiles was on the collapse and developing countries suffered much from the increased capital flow5. The developing countries were therefore to find a way of borrowing emergency funds. This crisis generally led to a global economic recession. Net x In 2013, the export of goods increased as compared to 2012 with 3.5% change. This insinuates a positive increase in the overall GDP of USA at that particular time. Further the imports during this year rose by 3% even though this did not have influence on the trade deficit. It is important to note that the exports increased despite the witnessed decrease in trading activities with major European countries. The following is bar graph indicating the trend from 2012 through to 2014: Retrieved from: http://www.tradingeconomics.com/united-states/exports Government spending In 2013, the government securities became progressively unmarketable because of the increasing mortgage failure. The bank mostly preferred to hoard liquid funds instead of lending them to others. The burst therefore led to a market filled with capital but shortfall of liquidity. This condition mainly prevailed in the global financial system leading to the loanable capital being abundant but with shortage of liquid because of the hoarding done by the financial institution6. Monetary policy During this year, the central bank served a greater part in leading the state effort to confront the persistent liquidity-shortage. The FED also used extraordinary methods including open market operation, discount window-lending, term auction facilities, direct lending to investment banks and swapping mortgage-backed for public securities. The central bank took weak collateral for some of this lendings thus shifts the credit risk onto their side (Posner 150). There was a progressive cut in the central bank interest rates throughout 2013 in the USA; lowering the rates operated as a subsidy to banks through lowering the cost of funds (Posner 66). The crisis of malfunctioning of financialised income and investment banking continued through two peaks in 2013 because of the tension between liquidity and solvency. The main action of the central bank was to inject liquidity on money market7. The liquidity injections that the central bank applied were not successful in fighting the crisis independently. 2014 C + I In 2014 for the first quarter, capitalism was a major factor influencing the overall GDP growth as a result of its effect on consumption and investment. Application of capitalism is mainly on state owned means of wealth8. The US workers, especially the poorest, led to the capitalism; which was the result of the amount of housing debts they were holding. The crisis therefore had a direct relation to the financialisation of workers’ personal income, especially the housing expenditure and the expenditure on other social amenities like education, health and insurance. The capitalism born crisis therefore spread to other economies globally because of the financialisation involved in the transformation of the existing financial institutions. Investment banking in conjunction with financialised personal income was the result of the USA crisis between the periods 2007 and 2013 especially due to the global recession9. Monetary policy In 2014, financialization was also an inherent factor affecting the institution of economic policy making. Central bank has always tried to control the financial success by mobilizing social resources to rescue the country’s financiers from crisis. This however has achieved little, implying that there is need for the government input in solving the crisis. The profits from both financial expropriation and investment banking are always a subject to the structure of a society10. Managers and other functionaries of finance are the ones who contribute to the profits. To other extent, financialisation has also affected the institutions of economic policymaking11. Capitalism in the US has also increased the effect of imperialism in 2014. The countries, which are in the process of stabilizing their economy, are forced to garner more of the international reserves consequently leading to the rise in rate at which the poor are lending to the rich. Due to the capitalism, there has been in an increase of private capital getting into the developing economies more than they export. This has therefore benefited the US as the issuer of the international means of payment even though it has affected the bubble of 2007 to 2014 (Lapavitsas 116). Asset allocation Alternative investments refer to the investments, which do not fall within the category of stocks, bonds or cash. The involved individuals in the case study suffer the risk of having less opportunity to publish their performance for the viewing by the potential investors. However, they would have to prefer alternative investment because there is no correlation between their returns and those of standard asset classes. The characters of financial system have deviated in the ways incompatible with the theory of finance capital. The balance between the financial systems always depends on stage of development, history, institutional structure, law and politics. In general, market based system constitute a greater financial market while bank and industry have cold relationship (Scott 31). 12The difference comes because the bank-based systems have prominent credit-system and close relationship between banks and industry (Streeck et al, 171). From the example of US, there has been a dominant international shift from the bank-based system toward market-based systems. From the general knowledge of capitalism in the US, there is need for special trading zone for an emergence of an empire. Financialised capitalism has not however produced phenomena of this type but instead they have put pressure for lower tariffs and homogeneous institutional framework of trading. However, the conduction of the process is in uneven and contradictory way, with much of discrimination against the less developed countries. Though not exclusive, the US has also created trading bloc through the NAFTA (Lapavitsas 125). The imposition of tariffs was a special description for the era of finance-capital. Asset allocation for CIA Monthly Return (%) 0.75 Standard Deviation 6.7655556     Annualized Exp Return (%) 9.05     Correlation 0.3455236     Wx 87.13% Wy 12.87%     Expected Return of Portfolio (%) 11.67 Standard Dev of Portfolio 6.59724 Cash flow report Formula: Operating Cash Flow - Capital Spending - ∆ in Net Working Capital = Total Cash Flow of the Firm (FCF) Creative Investment Artist (CIA) (2014): 1,360,465 - 555,026 - (-443,253) = 1,248,692 Efficient frontier for the company Work cited Copsey, Nat; Haughton, Tim. The Jcms Annual Review of the European Union in 2012. Blackwell Pub, 2013. Daianu, Daniel. Which Way Goes Capitalism?: In Search of Adequate Policies in a Dramatically Changing World. Budapest: Central European University Press, 2013. Drechsler, Wolfgang J. M, Carlota Perez, Kattel, R., & Erik S. Reinert. Techno-economic Paradigms: Essays in Honor of Carlota Perez. London: Anthem Press, 2013. Hensman, Rohini. Workers, Unions, and Global Capitalism: Lessons from India. New York: Columbia University Press, 2011. Ingham, Geoffrey. Capitalism. Cambridge: Polity, 2012. Print. Lapavitsas C. Financialised Capitalism: Crisis and Financial Expropriation. Historical Materialism [serial online]. June 2013;17(2):114-148. Available from: Academic Search Complete, Ipswich, MA. Accessed December 4, 2011. Liodakēs, G. Totalitarian Capitalism and Beyond. Farnham, England: Ashgate Pub. Company, 2010. O’Conor, Mike. Democratic Capitalism in the United State. Texas: ProQuest, 2007 Orhangazi, Özgür. Financialization and the Us Economy. Cheltenham, UK: Edward Elgar, 2007. Posner, Richard A. A Failure of Capitalism: The Crisis of 08 and the Descent into Depression. Cambridge, Mass: Harvard University Press, 2013. Posner, Richard A. The Crisis of Capitalist Democracy. Cambridge, Mass: Harvard University Press, 2010. Scott, Bruce R. Capitalism: Its Origins and Evolution as a System of Governance. New York: Springer, 2011. Print., Bruce R. Capitalism: Its Origins and Evolution as a System of Governance. New York: Springer, 2011. Smallwood, Bradford. Capitalism in the United States: Voices of the Unrepresented. New York: cs&p vol 3 no 2 may 2005 pp 172-176. Streeck, Wolfgang, and Kōzō Yamamura. The Origins of Nonliberal Capitalism: Germany and Japan in Comparison. Ithaca, N.Y: Cornell University Press, 2005. Vázquez, Francisco H, and Rodolfo D. Torres. Latino/a Thought: Culture, Politics, and Society. Lanham, Md. [u.a.: Rowman & Littlefield, 2003. Read More