
Spectrum builds its portfolios using fundamental
data and processing it with a computerbased 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 yieldtomaturity 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.

