Navigating Uncertainty: A Policy-Aware Approach to Diversification and Financial Stability in 2025
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Authors
Short, Luke
McCormick, Woods
Issue Date
2025-04-25
Type
Technical Report
Language
en_US
Keywords
Scholarship Sewanee 2025 , University of the South,Sector Diversification
Alternative Title
Abstract
This paper constructs a diversified equity portfolio intended to handle the shifting economy and changing political administration at the start of 2025. With a backdrop of decelerated GDP growth, inflation above the Federal Reserve’s target, and policy shift under the Trump administration, the future is uncertain. Proposed tariffs, deregulation initiatives, and corporate tax incentives are all on the horizon. Using an investment strategy that accounts for this uncertainty is crucial. Our strategy involves first selecting five industries through rigorous macroeconomic analysis. By combining both cyclical and defensive sectors we intend to capitalize on potential areas of growth from the new administration while minimizing risk. We then look at market-leading index funds and select the three top holdings from each to represent the sector. Using CAPM alpha and beta values, as well as sector specific insights, we narrow down each sector to one holding. The weight allocations for the portfolio will be designated using Modern Portfolio Theory and the Sharpe Ratio. Using five year historical data, these will determine the optimal risk return tradeoff portfolio. By combining both current macroeconomic analysis and a model based approach, our portfolio is data backed with real world applications.
Description
Citation
Publisher
University of the South