How Accurate are Capital Market Assumptions, and How Should We Use Them?

7 Pages Posted: 26 Aug 2022

See all articles by Mike Sebastian

Mike Sebastian

affiliation not provided to SSRN

Date Written: August 8, 2022


• Capital market assumptions (CMAs) are almost universally used in the institutional investment world in the strategic investment policy setting process, but their forecasting accuracy is rarely assessed

• Ten years of history of a broad survey of CMAs allows us to examine the industry’s success in forecasting future returns

• Industry consensus CMAs from ten years ago were off the mark for all of fifteen major asset classes, with the actual ten-year returns out of the industry range from most pessimistic to most optimistic for 14 of the 15 markets.

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

• CMAs for “active” asset classes like private equity and hedge funds will 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 fund 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, give consideration to 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; reality is that fund overseers need something, and imperfect forecasts are the best we have.

Keywords: investments, asset allocation

Suggested Citation

Sebastian, Michael D., How Accurate are Capital Market Assumptions, and How Should We Use Them? (August 8, 2022). Available at SSRN: or

Michael D. Sebastian (Contact Author)

affiliation not provided to SSRN

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