Estimate Expected Returns

Map scenario probabilities onto asset class returns

Estimate asset class expected returns

This screen will show you the annualized expected historical returns, the mapped expected returns across the set of asset classes in your case file, and the scenario-weighted expected returns.

Scenario Lab maps the prospective economic scenarios onto asset class returns by

1. Calculating the rolling yearly returns of asset classes (dependent variables) in excess of cash

2. Calculating the yearly changes in economic variables (independent variables)

3. Running a multi-factor regression

Scenario-dependent asset class returns are calculated using the prospective change in each economic variable with the regression coefficients. The prospective change is calculated by evaluating the difference between the prospective scenario estimates for each economic variable and the anchor condition.

A cash instrument is specified on this screen along with a configurable risk-free rate. The software platform marks the lower return instrument as cash absent of your specification.

By multiplying the scenario dependent returns with scenario probabilities, we arrive at the probability-weighted-average estimate for each asset class. We always present this in the right-most column of the grid under the column "Scenario-Weighted".

The framework of mapping prospective economic scenarios onto asset class returns are described with detail in the Journal of Portfolio Management article, "Enhanced Scenario Analysis".