Asset Allocation

Quick Clips: 2022 Capital Market Assumptions for Major Asset Classes

Topics - Asset Allocation Strategic Asset Allocation Tactical Asset Allocation Alternative Investing

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Quick Clips: 2022 Capital Market Assumptions for Major Asset Classes

Since 2014, we have published our capital market assumptions for major asset classes, focusing on medium-term expected returns. During that time, rising valuations have delivered strong realized returns at the cost of falling expected returns. At the start of 2022, expected real returns for all asset classes remain depressed due to exceptionally low real cash rates. 

Our outlook on stock/bond portfolios differs from the past decade (0:26):

As well as traditional asset classes, we also estimate long-term returns for style-tilted long-only portfolios and long/short style premia. Our research has shown that timing factor exposures based on their valuations is difficult, but tilts may be warranted at extremes. At the start of 2022, we believe the continued extreme cheapness of value could warrant an overweight to that style in a multi-factor strategy. 

We outline our assumptions for Alternative Risk Premia, noting the difficulty of factor timing (0:55):

Previous forecasts of low expected returns turned out to be too pessimistic. We compare the assumptions stated in our paper of a decade ago (link 5% Solution paper) to the outcomes in the subsequent decade, and find that equity market richening was the main driver of strong realized returns. We do not believe a repeat of the past decade is likely.  

We consider a scenario that could deliver a 5% real return for traditional portfolios (0:58):

We consider practical incremental changes that could increase expected returns without adding substantial risk. Those changes include allocating to defensive equity, adding exposure to bonds and commodities, and adding diversifying liquid alternatives to a portfolio.  

We explain the potential outcome of implementing these practical portfolio changes, according to our assumptions (0:44):

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


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