Each year, key investment strategists develop a set of projections for asset‐class returns, volatilities and correlations over the coming 10‐15 years. These projections, or so‐called “long‐term capital market assumptions,” are used by investment managers as a guide to developing reasonable investment return
expectations and asset allocation frameworks in order to effectively manage client portfolios. Equilibrium relationships between markets and trends in economic growth over the long term, informed by current market and macroeconomic conditions, are key drivers in the process.
The projections themselves represent baseline average returns over the projected horizon. Applying a volatility assumption to each projected return provides an expected range of returns around each baseline. For example, using the average baseline return projection for large‐cap equities of 6.08%, coupled with a 14.34% volatility assumption for that asset class, produces a range of expected annual returns for large‐cap equities of 3.27‐8.89% over the next 10 years or so. Similarly, long‐term investment‐grade bonds are projected to return 3.72% on an annual basis, with a range of 3.05‐4.39%.
