Spectrum builds its portfolios using fundamental data and processing it with a computer-based optimization process. To optimize a portfolio’s allocation among asset classes, we need to describe, quantitatively, certain characteristics of those markets. We need three descriptors of an asset category- its expected return, its risk, and its correlation of returns versus the other asset categories.

The expected return is the discount rate or yield-to-maturity for the asset class. This discount rate is the factor that equates the future expected cash flows to the present value of the asset (i.e., the market price). We then determine the discount rate for the stock market by aggregating the discount rate for each of several thousand stocks. Our analysis is based on “consensus” data drawn from hundreds of Wall Street analysts.