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Multi-Asset Investing: A practical guide to modern portfolio management by Yoram Lustig

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14. Forecasting

The objective of forecasting is formulating an objective view of the future direction of investments. It is one of the most challenging roles of investment management, because crystal balls do not work in real life. As Mark Twain said, “it’s difficult to make predictions, especially about the future”. Many investors erroneously tend to extrapolate recent history and base their forecasts on current sentiment. When markets are up, investors are positive and so are their forecasts. When markets are down, investors are negative.

As has been shown, SAA is based on forward-looking CMAs that are normally derived through a systematic, quantitative process that aims to forecast expected returns, risks and correlations of asset classes ...

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