The Accuracy and Use of Capital Market Assumptions

7 Pages Posted: 26 Aug 2022 Last revised: 25 Oct 2023

Date Written: October 24, 2023


Capital market assumptions (CMAs) are widely used in the investment strategy development process, but assessments of their forecasting accuracy are usually made available only by individual providers, if at all.

Over ten years of history of a broad survey of CMAs allows us to examine the industry’s success in forecasting future returns. This represents the only broad analysis of this type that the author has seen to date.

Actual ten-year returns were out of the range of industry CMAs from most pessimistic to most optimistic for 10 of the 16 markets. The six in-range asset classes represent smaller allocations in the typical portfolio, while large-capitalization U.S. and developed non-U.S. stocks, and core and long-duration bonds, among others, were out of range.

Industry consensus CMAs have predicted relatively stable return premiums (stocks over bonds, non-U.S. over U.S.) when actual 10-year return premiums have been volatile and cyclical.

CMAs for “active” asset classes like private equity and hedge funds may not be a good guide to future returns, due to high active manager dispersion and the lack of an investable “market”.

Some suggested keys to success with capital market assumptions include:

o De-emphasize CMAs in the asset allocation process, in favor of starting with the market portfolio and then adjusting based on any (mostly qualitative) strong views and your circumstances and objectives

o Focus on the unique characteristics of your circumstances, objectives and portfolio relative to others, as much as on market expectations

o Be aware of how the CMAs you use compare with industry averages. Where they are different, consider why.

o Use CMAs to assess a variety of economic and market regimes and stress-test

o Be cognizant of time horizon; avoid setting policy frequently using long-term assumptions, which is demonstrably suboptimal

o Learn to love the CMAs; the reality is that investors need something, and even imperfect forecasts have value

Keywords: investments, asset allocation

Suggested Citation

Sebastian, Michael D., The Accuracy and Use of Capital Market Assumptions (October 24, 2023). Available at SSRN: or

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