Capital Market Assumptions

Asset allocation is one of the most important decisions related to investment in the capital market. There are a number of risk factors related to these investments, and because of this appropriate capital market analyses are necessary. There are firms which provide capital market investment solutions to investors, each making their own risk and return calculations, or capital market assumptions. These assumptions are followed strictly when making suggestions to the clients regarding the asset allocation. Many companies also provide their clients with their capital market assumptions so that the clients can evaluate their own investment decisions.

Of course, capital market assumptions cannot be permanent and thus need to be changed from time to time. The market prices of different investment instruments change very rapidly, and with this rapid change the level of risk also changes. Different consultation companies use different techniques to get their perfect capital market assumptions. However, most companies concentrate on valuations because they can provide the most accurate capital market assumptions for the future.

Other factors useful in making capital market assumptions are the ratio between the price and earning of the particular asset, the dividend yield, the interest rates, and the growth rate of the assets.

Apart from the internal factors of the capital market, there are also macroeconomic trends that are related to making capital market assumptions. These include the level of inflation, changes in the Gross Domestic Product (GDP), and increases or decreases in the unemployment rate. International external factors related to the capital market which play a major role in shaping capital market assumptions too include taxation, foreign denominations, and decisions of national regulators.