Asset Allocation

2016 Capital Market Assumptions for Major Asset Classes

Topics - Asset Allocation Strategic Asset Allocation Portfolio Construction

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2016 Capital Market Assumptions for Major Asset Classes

This issue updates our multi-year expected return assumptions for major stock and bond markets, and investigates methods for estimating expected returns for credits and commodities. Compared with historical averages of value metrics, we are still very much in a world of low expected returns.

  • Our current estimate for U.S. stocks’ long-run real return remains near 4%, lower than in European and emerging markets. In the U.S. and several other markets, modest increases in earnings and dividend yields over the past year have been offset by reductions in forecast earnings growth.
  • For 10-year U.S. Treasuries, our long-run real return estimate remains near 0.5%. From a century-long historical perspective, both equity and bond expected returns remain exceptionally low, especially when taken together.
  • This year we include long-run expected returns for credits and commodities, explaining our chosen methodology for each asset class. For U.S. investment grade and high yield credit, we estimate real returns of around 1% and 3%, respectively. For a risk-weighted portfolio of commodities, we estimate a long-run real return of around 3%. We also discuss return expectations for alternative risk premia and cash.

This report again highlights the low expected returns in traditional asset classes. It also expands our menu of assumptions for additional sources of return that may prove valuable in this challenging environment. We believe investors should diversify as much as constraints permit across many sources of expected returns.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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