Going from capital market expectations to asset allocation requires analysis and interpretation. In order to improve performance and client-advisor relationships, it is essential to translate and identify the fundamental factors affecting portfolios and asset allocations. Macro-based Recommendations Macro recommendations involve…

Variance Covariance (VCV) Matrices The simplest and most commonly used method for estimating constant variances and covariances is to use variance or covariance–computed from historical return data. These elements are then assembled into a VCV matrix. The following table shows…

There are three principal ways in which trade goods and services can influence exchange rates: Trade flows. Purchasing power parity. Current account. Trade flows tend to make up a small portion of total GDP and exert little influence on exchange…

Forecasting Real Estate Returns This reading focuses on directly held, non-levered, income-producing real estate. REITs are covered in further detail in other sections. Directly held real estate is distinct from other asset classes because it is immobile, illiquid, indivisible, and…

Most of the risks bondholders face in emerging market debt pertain to equity investments in those same markets, including but not limited to: More fragile economies. Weaker legal protections. Less stable political and policy frameworks. It is important to remember…

Historical Statistical Approaches Historical statistical approaches involve the collection of data from past returns and using them to extrapolate future performance. Using a pure-historical returns approach to forecast equity market returns is complicated because equities have a high standard deviation…

The history of emerging and/or frontier market government borrowers began slowly with only a few nations. It has since grown into a large and distinct market. Numerous crises from Latin America, Asia, and Europe have plagued the market throughout its…

To inform the asset allocation process and adequately set client expectations, analysts must be able to create realistic and defensible forecasts for all asset classes, including fixed income. The main ways to approach forecasting fixed-income returns include: Discounted cash flow:…

How do the dealings of one country affect the economies of other countries across the globe? Most countries are linked via a global economic network of trade. Countries with more extensive, robust, and diverse economies tend to be less influenced…

The shape of the yield curve is often cited as a leading reliable economic indicator. The yield curve maps the relationship between interest rates and the maturity of fixed-income investments on a graph. On the horizontal axis is time or…