How are the default returns, volatilities and correlations calculated?
The return estimates provided to RSP 3 are intended as starting points for each advisor’s analysis, or to be used as is in the absence of better data. The returns are based on two methodologies. The Standard Asset Class returns are based on a model whose inputs include an estimate for economic growth, change in valuation, asset class growth rate assumptions relative to economic growth and a starting yield. The Size-Value Asset Class return estimates are based on the Fama and French 3-factor model risk premiums, an estimate of the market, size and value coefficients and an estimate of inflation. Fixed income returns are based on current short term yield to maturity estimates. Standard deviation and correlation estimates are based on historic numbers.
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