The assumptions on the long-term steady state values, or for a more familiar term, the long-term Capital Market Assumptions (CMAs), are required for economic growth, inflation, interest rates and the expected returns on financial assets. It is not hard to imagine that long-term CMAs are a very important ingredient of any investment decision-making framework. However, what sometimes seems to be forgotten, is that these long-term CMAs are very uncertain, even if they are used as inputs for a stochastic risk & return model. In our scenario approach, we therefore explicitly take this uncertainty about long-term CMAs into account.
In this paper, we discuss how we arrive at our long-term CMAs, how we take the uncertainty around these assumptions into account, and we illustrate its relevance for investment decision-making.
If you are interested in learning more about this topic, contact Hens Steehouwer here.
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Hens Steehouwer
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