Target return and target volatility are the capital market assumptions for your model. They are the projected return and volatility for your model for the next 3-5 years.
Another way to look at it is that this is the expectation you are setting up your clients for.
If you have a reliable source of projection, use it. If you don't, Andes Risk Platform provides useful data points to help you set the target return and volatility for your model.
Andes Risk Platform Risk Bands
If your model name contains "conservative", "moderate", "growth", "aggressive", reference the Andes Risk Bands below to ensure consistency.
For example, if you have a model called "aggressive" and you set the target volatility to 12.8, the Risk Tolerance Test will classify it as "Growth" based on the risk bands below, contradicting the model name.
If the data points suggest a target volatility between 15 and 18, it will be consistent. If you have any questions or different opinions, please talk to your contact at Andes Risk.
Andes Risk Band
| Risk Band | Volatility Range: Lower | Volatility Range: Upper |
| Very Conservative | 0 | 4 |
| Conservative | 4.01 | 8 |
| Moderate | 8.01 | 12 |
| Growth | 12.01 | 16 |
| Aggressive | 16.01 | 20 |
| Aggressive Plus | 20.01 | 1000 |
Target Return and Volatility for System Models
The Andes Risk platform provides two sets of system models. Below are the target return/volatility for your reference.
Classic Model Set
This model set has four asset classes: US Equity (as represented by SPY), Global Equity (ACWX), Bond (BND) and short-term (SHV). The target return and volatility for each model is based on historical averages from 1999 to 2022.
| Model Name | Model Position Weights (SPY/ACWX/BND/SHV) | Target Return | Target Volatility |
| Classic Conservative 20/80 | 15/5/50/30 | 4.00 | 4.60 |
| Classic 30/70 | 25/5/50/20 | 4.70 | 6.30 |
| Classic 40/60 | 30/10/45/15 | 5.30 | 8.00 |
| Classic Balanced 50/50 | 35/15/40/10 | 5.85 | 10.00 |
| Classic Balanced 60/40 | 40/20/35/5 | 6.30 | 11.90 |
| Classic Growth 70/30 | 50/20/25/5 | 6.80 | 14.00 |
| Classic Aggressive 85/15 | 60/25/15/0 | 7.50 | 17.00 |
| Classic Aggressive Plus 100/0 | 70/30/0/0 | 8.00 | 20.20 |
Classic U.S. Only Model Set
This model set has two asset classes: US Equity (as represented by SPY) and Bond (BND). The target return and volatility for each model is based on historical averages from 1986 to 2022.
| Model Name | Model Position Weights (SPY/BND) | Target Return | Target Volatility |
| Classic U.S. Conservative 20/80 | 20/80 | 5.50 | 5.30 |
| Classic U.S. 30/70 | 30/70 | 6.10 | 6.70 |
| Classic U.S. 40/60 | 40/60 | 6.64 | 8.20 |
| Classic U.S. Balanced 50/50 | 50/50 | 7.20 | 9.80 |
| Classic U.S. Balanced 60/40 | 60/40 | 7.67 | 11.50 |
| Classic U.S. Growth 70/30 | 70/30 | 8.10 | 13.40 |
| Classic U.S. Aggressive 80/20 | 80/20 | 8.50 | 15.40 |
| Classic U.S. Aggressive 90/10 | 90/10 | 8.80 | 17.20 |
| Classic U.S. Aggressive Plus 100/0 | 100/0 | 9.12 | 19.20 |
Data Points to Help You Set Target Return and Target Volatility
Historical Average for the Long-term or Specific Time Period
The first data point is the long-term historical average return and volatility. If you have reasons to believe the next 3-5 years is like a certain historical time period, you can use that instead of the long-term average.
For setting the target return, the long-term historical return is a good proxy. If you have reasons to believe that the next 3-5 years would be worse-off, you can revise it down. Generally, it is not a bad idea to revise down a bit to be safe ("under-promising").
For setting the target volatility, it is a good idea to take a look at the shorter-term volatilities (1-year, 3-year, 5-year, etc.), as well as historical worst. See below.
Most Recent Time Periods and Best/Worst
After you calculate the deep analytics, go to the Best/Worst tab, and you will find the return and volatility for the most recent time period:
Scrolling down, you will see the best and worst time periods:
