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? 

 

 b) Another Bloomberg (9 May 2022) article reports "Cash is the only winner in a market gripped by stagflation fear ... we're 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. 

 

c) Chris Brightman, a chief investment officer, is quoted in the news report as saying, "You cannot count on the sort of investment returns seen over history for a period of time. Bond yields, dividend and earnings yields are at a low starting point and it means future returns will be low when compared to history."  

Required

If bond yields, dividend and earnings yields are low, why does it mean we should expect future returns to be low?