Intro

This is the second of two readings focusing on capital market expectations. A central theme of both readings is that a disciplined approach to setting expectations will be rewarded. After outlining a framework for developing expectations and reviewing potential pitfalls, the first reading focused on the use of macroeconomic analysis in setting expectations. This reading builds on that foundation and examines setting expectations for specific asset classes—fixed income, equities, real estate, and currencies. Estimation of variance–covariance matrices is covered as well.

The reading begins with an overview of the techniques frequently used to develop capital market expectations. The discussion of specific asset classes begins with fixed income in Sections 3 and 4, followed by equities, real estate, and currencies in Sections 5–7. Estimation of variance–covariance structures is addressed in Section 8. Section 9 illustrates the use of macroeconomic analysis to develop and justify adjustments to a global portfolio.