Market Insight - Macro-Sensitive Portfolio Strategies: Pricing and Analyzing Macro Risk - April 2013

Apr 29, 2013

Our previous papers in this series showed that cash flow betas relative to economic growth vary by asset class and portfolio type. In this paper, we show that assets with higher cash flow betas receive a higher long term return, and that return is a compensation for the macro risk exposure. We label those holdings risk premium assets. We further show that long‐term portfolio risk can be attributed to multiple macro factors, such as persistent shocks to real GDP, and inflation. We show that portfolios that tilt towards risk premium strategies receive a higher return than the market portfolio when there are positive shocks to economic growth. Finally, we demonstrate that portfolios with significant exposures to nominal bonds receive an inflation premium; while all portfolios are hurt by increases in inflation, portfolios with high exposures to nominal bonds are hurt even more.