The first step in the important asset mix decision is forecasting the financial environment. To assist the decision-maker in his forecast, this article examines five possible 1980 environments: (1) real growth in the four to five per cent range, with inflation decelerating to, say, three per cent; (2) real growth in the four to five per cent range, but inflation at four to five per cent; (3) on again, off again real growth with inflation of five to six per cent; (4) off again, on again growth with inflation declining to very low rates; and (5) repetition of the boom-bust sequence of the first half of the current decade.

Based on monetary policy and demand in the foreign sector, the government sector, the corporate sector and the consumer sector, the article assigns probabilities to these environments and assesses the implications of each environment for three key asset classes—stocks, bonds and commercial paper.