Exhibit 1: Medium-Term Expected Real Returns for Liquid Asset Classes
2023 Capital Market Assumptions for Major Asset Classes
Topics - Asset Allocation Strategic Asset Allocation Portfolio Construction
This article updates our estimates of medium-term (5- to 10-year) expected returns for major asset classes. Selected estimates are summarized in Exhibit 1. In 2022 expected returns moved slightly higher for equities, and sharply higher for bonds and cash. The expected real return of a 60/40 portfolio increased to 3%, near its decade high but still well below the long-term average of nearly 5% (since 1900
Historical comparison is based on a simpler methodology than main estimates, due to data availability; methodology described in Appendix.
), and even further below realized returns of the previous decade.
The article also includes two focus topics: one highlighting the case for emerging market equities, and the other assessing the impact of large interest rate rises on various risk premia—some of which appear compressed at the start of 2023.
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