Alternative Thinking

What’s the Worst That Should Happen?

Topics - Asset Allocation Strategic Asset Allocation

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What’s the Worst That Should Happen?

Expected returns on traditional assets are lower than their historical averages, yet the same is not true for risks. Setting expectations — for investors, boards, and other stakeholders — may be more important today than ever. This article does just that. We provide a framework to set expectations on downside risk, one that can be used for a range of assets, portfolios, and investment decisions. Among our findings, we show that diversification and liquidity may be even more valuable than conventional risk-return statistics suggest.


About the Portfolio Solutions Group
The Portfolio Solutions Group (PSG) provides thought leadership to the broader investment community and custom analyses to help AQR clients achieve better portfolio outcomes.

We thank Justin Boganey and Dan Villalon for their work on this paper. We also thank Amir Becher, Pete Hecht, Antti Ilmanen, Kevin Infante, Derek Jansma, Brad Jones, Bill Latimer, Ari Levine, Marianne Love, Thom Maloney, Nick McQuinn, Zach Mees, Diogo Palhares, Ted Pyne, Ernst Schaumberg, Ashwin Thapar and Scott Yerardi for their helpful comments.


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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.