This is a reading in CFA level three .

Key Lessons From this reading :

In order to built expected market returns we need to know expected return for each asset class , standard deviation for each asset class and the correlations between assets .

There is a seven step framework that is important for anyone involved in working out asset allocation for an investor or themselves.

1. Identify the specific Capital Market Expectation ( CME ) needed based on investor’s investing objective. Things to consider allowable asset class , time horizon and tax status . E.g: I want to invest in Canadian stocks for my three year old nephew in his RESP .
2. Research Historical Records . E.g : In order to come up with how the market might perform it would be good to take a look at how Canadian stocks did over various 15 year investing periods .
3. Identify the valuation model and its requirements. E.g : Once I identified specific Canadian equities I may use a DCF to calculate future value of those specific stocks .
4. Collect the best data possible. E.g: I may use a well known vendor for my growth rate in my DCF calculation .
5. Use experience and judgement to interpret current investment conditions. E.g : I may adjust my DCF growth rate for upcoming economic predictions based on my experience in similar conditions before .
6. Formulate CMEs and document conditions. E.g: Capture 1 to 5 in writing .
7. Monitor actual outcome and refine process . E.g : evaluating performance over time and improving methodology.