Question 1

1. A large charity's investment portfolio has been conventionally invested in the following traditional mix of equities and bonds.

Portfolio Mix	% weight	$ weight
Equity
Developed market publicly listed large company equity	55%	$550m
Emerging market publicly listed large company equity	5%	$5m
Bond
Mix of developed country sovereign coupon paying bonds	40%	$400m

Over the past 3 years, the macroeconomic picture of higher than usual inflation, lower than usual economic growth, rising interest rates, and elevated geo-political risks, caused the portfolio to perform comparatively poorly in 2021, 2022, and 2023.

Mike, the charity's portfolio manager, has become increasingly aware just how much economic conditions appear to impact portfolio performance.

Mike now believes that investment returns are often responses to movements in inflation, growth, interest rates, economic leverage, and investor risk appetite.

Mike has produced the illustration below to summarise his views about the inter-relationship between macro economic drivers and the returns of different assets.