We want to define the asset allocation of a portfolio. The US economy is in a slowdown phase of the business cycle:

- GDP growth is decelerating (2.5% to 1.7%).

- Corporate profits have stalled in recent quarters. However, the rate of improvement in the US corporate profits has increased and continue to be positive over last years.

- Inflation is low.

- Federal Reserve has cut Fed Funds interest rates 3 times over the last quarters (from 2.5% to 1.5%).

- Oil and most of the commodity prices are lower than they were a year ago.

- The US Dollar has appreciated within the last year against most currencies, damaging the competitiveness of US exporters.

In this situation, you have to choose one of the following portfolios. The time horizon of your investment is long-term (your strategic asset allocation time horizon is ten years). However, you must make a proposal to position yourself in the best tactical allocation over the next months (tactical asset allocation one year).

a. Portfolio 1: Increase the equity positions up to 50% while keeping fixed income at 50% with a duration of 5 years.

b. Portfolio 2: Reduce the equity position to 10%, while increasing fixed income to 50% and keeping bank deposits at 40%

c. Portfolio 3: Reduce the equity position to 10%, while reducing the fixed income to 10% and increasing bank deposits to 80%

d. Portfolio 4: Maintain 30% of the portfolio invested into defensive stocks, 30% in fixed income securities with a duration of 10 years and the remaining 40% in bank deposits

Try, if possible, to estimate the expected return of your portfolio over the next year as well as the risks related to your choice.