The projected long-run risk premium for the Global Market Index (GMI) rebounded in April after slipping below 4% annualized in the previous month. Today’s revised estimate for GMI: 4.3%, which is the index’s long-term projection over the “risk-free” rate. Compared with the outlook a year ago, today’s forecast is modestly lower.
The coronavirus crisis has created unusually high volatility in asset classes since March and the effects have rocked GMI risk premia estimates lately. Relative to the fractional changes that are typical from month to month, recent updates for risk premia estimates have been comparatively large.
GMI is an unmanaged, market-value-weighted portfolio that holds all the major asset classes (except cash) and represents a benchmark of the theoretical, optimal risk portfolio for the average investor with an infinite time horizon. As such, GMI is a starting point for asset allocation research and portfolio design.
Today’s performance forecast for GMI continues to reflect an outlook that’s below the benchmark’s historical return, based on the trailing 10-year period through last month. At the end of April 2020, GMI’s risk premium was an annualized 5.4% for the past decade. That’s still well above the current 4.3% forecast, which suggests caution for expecting GMI (and other multi-asset-class strategies) to deliver results that match or exceed the performance during the previous bull market. Indeed, a year ago (through April 2019), GMI’s trailing 10-year annualized risk premium was substantially higher at 8.0%–a performance that has been cut sharply this year.
Expected Vs Trailing Risk Premia
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