CASE ASSIGNMENT 2: GLOBAL ASSET ALLOCATION: INVESTING IN A TIME OF DEBT, DEFICITS, AND QUANTITATIVE EASING This case is an opportunity to take a step back and discuss the implications of major global Central Banks' policies on financial markets. Pension fund manager Lynda Chen had built into the pension calculations 7% expected return. Relative to other pension funds, this was conservative. But in this world of debt, deficits, and quantitative easing (and negative interest rates!), could she count on such a return going forward? Or did she need to further reduce the fund's expected returns assumptions? Currently, as shown in case Exhibit 1, her fund was invested in equities (in the United States, other developed markets, and emerging markets) and fixed income (U.S. government and non- U.S. sovereign bonds), with a portion of investable funds kept in cash in case good opportunities arose. Whether or not she changed the assumed expected returns, should she consider altering the fund's global asset allocation? Assignment Questions As a team, prepare a case report which will consist of at most two pages of Case Summary, where you briefly summarize the case and an Analysis part where you provide answers to the following questions in depth. Let's take a five -year time horizon. 1. (40 points) Treasury bond yields (a) (15 points) What are the main drivers of the yields of long term (e.g., 10-year) Treasury Bonds? Make a prediction for the 10-year Treasury yield. (b) (15 points) Given your 10-year Treasury yield prediction, make a prediction for returns on 10-year U.S. Treasury bonds using the Bond Returns for 5yr HP tab. (c) (10 points) Check Mkt Returns and Valuations tab. The first part of the table shows real annual returns of treasury bonds given the real yield at the time of the purchase. What does the table imply for returns on 10-year U.S. Treasuries over the next five years? Do you want to change your answers? Why