I want to Add Asset Classes to the Monte Carlo Simulation, where can I find the informtion required by ESP.
Nominal Rate of retun Varience to a diversified stock and Beta compared to a large cap stock?
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Hi, in the Monte screen, when you enter a New Asset, we ask you in Step 2 to specify a) the expected nominal return (given this value and your inflation assumption, we determine the expected real return on your New Asset),
In Step 3 we ask you to enter the variance of the real return on your New Asset expressed as a percentage of the variance of the real return on large cap stocks. (FYI, the variance of the real return on large cap stocks historically has been .0426 and he square root of this, called the standard deviation, has been .2064). As of 2/23/09, the variances of the real returns of our canned assets expressed as a percentage of the variance of large caps are given in the table below. These values may help you decide what to enter in step 3 for your New Asset.
Variance of the real return on our canned assets expressed as a percentaage of the variance fo the real return on large cap stocks as of 2-23-09
Cash 5.22%
Large Cap Stocks 100.00%
Small Cap Stocks 231.66%
Long Term Corporate Bonds 22.58%
Long Term Government Bonds 25.47%
Long Term Inflation-Indexed US Gov Bonds .21%
Intermediate Government Bonds 11.56%
Short Term Government Bonds 4.22%
Non-US Equity 96.15%
Pacific Basin 185.39%
European Equity 90.13%
Emerging Markets 208.58%
REITs 67.18%
In Step 4, you need to enter the value of beta for your new asset. Listed below are the Betas as of 2-23-09 for our canned assets. They will give you an idea of what to enter for your New Asset. A beta is measured as the ratio of the covariance of the the real return on the asset in question with the real return on stocks divided by the variance of the real return on large caps.
Betas for Our Canned Assets as of 2-23-09
Cash 0.044956366
Large Cap Stocks 1.00
Small Cap Stocks 1.147
Long Term Corporate Bonds 0.117
Long Term Government Bonds 0.096
Long Term Inflation Indexed Government Bonds 0.006
Intermediate Government Bonds 0.049
Short Term Government Bonds 0.024
Non-US Equity 0.057
Pacific Basin 0.054
Europe 0.063
Emerging Markets -0.315
REITs -0.193