a) A recent (16 March 2022) Bloomberg news report describes a 60/40 fund (i.e, a fund with 60% allocated to equities and 40% allocated to bonds) as one of the most conservative approaches to asset allocation in portfolios.

Required

a) Are bond prices and stock prices positively or negatively correlated? If so, why? If not, why not? (4 marks)

b) Another Bloomberg (9 May 2022) article reports Cash is the only winner in a market gripped by stagflation fear were holding our cash with both hands, said BlackRock, an investment company.

(Stagflation is defined as persistent high inflation combined with high unemployment and stagnant demand in a country's economy.)

Required

b) Explain reasons for investors holding cash if inflation is expected to be high. (2 marks)

c)

Chaos Is Becoming the Rational Base Case in Market Ruled by Fear

Lu Wang and Denitsa Tsekova Bloomberg 16 July 2022

"Ask paid stock forecasters what the market will do next, and the answers arent reassuring. Anything from plunge 12% to jump 32%, say S&P 500 strategists tracked by Bloomberg, among the widest ranges on record."

Required

c) Assume an individual has an investment portfolio containing equities, bonds, and foreign exchange. With respect to modern portfolio theory, explain how the individual could improve the diversification of their portfolio. Assuming there is heightened uncertainty, risk of recession, and high inflation over the next 6 months, will the additional diversification help the individual if they are required to sell assets in their portfolio in 6 months time? (4 marks)